In a recent development that may bring relief to the Federal Reserve and market watchers, the personal consumption expenditures (PCE) price index, a favored inflation gauge of the Federal Reserve, showcased a rise that was less than anticipated in August. This suggests that the central bank's ongoing battle against surging prices is bearing fruit.
For the month of August, the PCE price index, excluding food and energy, witnessed an increase of 0.1%. This was notably lower than the projected 0.2% gain, as per the consensus of economists from Dow Jones. When viewed on an annual basis, the core PCE's increase was pegged at 3.9%, aligning with forecasts. This marked the smallest monthly surge since November of the previous year.
However, it wasn't just the inflation numbers that drew attention. Consumer spending, on a current-dollar basis, climbed by 0.4%. This was a significant drop from the 0.9% observed in July. When adjusted for real terms, the spending increase was a mere 0.1%, a decline from July's 0.6%.
When food and energy were factored in, the headline PCE rose by 0.4% for the month and 3.5% on an annual basis. After reaching 3.2% in June, headline inflation has been on an upward trajectory in the subsequent months.
The PCE index is held in high regard by the Federal Reserve due to its ability to account for shifts in consumer behavior, such as opting for lower-priced goods in place of pricier alternatives. This makes the PCE a more accurate reflection of the cost of living compared to the consumer price index, which gauges costs without considering such substitutions.
Quincy Krosby, the chief global strategist at LPL Financial, commented on the report, stating, "The Fed must be pleased with the overall direction of the PCE report, but declaring victory on quelling inflation would be premature." The report highlighted that the monthly inflation was primarily propelled by energy costs, which surged by 6.1%. Meanwhile, food prices saw a modest rise of 0.2%.
The Federal Reserve has set an inflation target of 2%, viewing it as a sign of a balanced growth rate for the economy. The last time the core PCE touched this level was in February 2021. Since March 2022, the central bank has been aggressively hiking interest rates, although it chose to forgo an increase in the September meeting. Market experts largely believe that the Fed's rate-hiking spree has concluded. However, some Fed officials have hinted at a potential quarter-point hike before 2023 wraps up.
