US inflation increased less than expected in August and price pressures were more moderate in the prior month than previously reported, likely reducing the urgency for the Federal Reserve to raise interest rates again in October.
Another rate hike this year, however, remains on the table as the report from the Commerce Department yesterday showed consumer spending surging last month. The economy so far appears to be holding up despite headwinds from the US-Israeli war with Iran, which has raised energy prices, with diesel prices at record highs. Financial markets knocked down bets for a rate increase next month.
“The less-than-feared price data for August may buy the Fed time to await more data and pass on October 28, but still-elevated inflation and a resilient consumer and economy point to another rate hike by year-end,” said Sal Guatieri, a senior economist at BMO Capital Markets.
The Personal Consumption Expenditures Price Index rose 0.3 per cent last month after a downwardly revised 0.1pc gain in July, the Commerce Department’s Bureau of Economic Analysis said. Economists polled by Reuters had forecast the PCE price index rising 0.4pc after a previously reported 0.2pc gain in July.
In the 12 months through August, PCE inflation advanced 3.4pc after increasing by a downwardly revised 3.4pc in July. PCE inflation was previously reported to have increased 3.7pc in July on a year-on-year basis.
The BEA changed its methodology for calculating prices for software and accessories, portfolio management fees and legal services in the PCE price index.
It also revised the inflation data going back to 2021. Excluding the volatile food and energy components, the PCE price index climbed 0.2pc over the month after a downwardly revised 0.1pc rise in July.
It also revised the inflation data going back to 2021.
The so-called core PCE inflation was previously estimated to have gained 0.2pc in July.
Core PCE inflation increased 3.0pc year-on-year in August after a downwardly revised 3.0pc advance in July. Underlying inflation was initially estimated to have risen 3.3pc in the 12 months through July. The US central bank tracks the PCE price measures for its 2pc inflation target.
The Fed this month raised its benchmark overnight interest rate to the 3.75pc-4.00pc range, the first rate hike in three years, and flagged further increases in borrowing costs in the months ahead. The odds of an October rate hike were diminished by New York Fed President John Williams’ comments on Tuesday that he saw ‘no urgency’ for further action.
Financial markets priced in a roughly 34.9pc chance of an increase in borrowing costs at the October 27-28 meeting, CME’s FedWatch Tool showed. That was down from 51.5pc before the inflation data and 70pc on Monday. US stocks rose. The dollar slipped against a basket of currencies. US Treasury yields fell.
Higher inflation and borrowing costs could crimp consumer spending. A survey from the Conference Board on Tuesday showed consumer confidence plummeting to a near 12-1/2-year low in September.
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