US inflation data showed mixed signals in August, with the overall Personal Consumption Expenditures (PCE) price index rising 0.3% month-on-month and 3.4% year-on-year. The 0.3% monthly rise in overall PCE inflation was below economists’ expectations. In July, the overall PCE measure had increased 0.1% from the previous month.
On a yearly basis, overall PCE inflation remained at 3.4% in August, unchanged from July. The reading was also below expectations. The core PCE measure, which excludes food and energy prices, rose 0.2% month-on-month in August. The measure had increased 0.1% in July.
Core PCE inflation in August
Economists had expected core PCE inflation to rise 0.3% in August, meaning the actual monthly increase was lower than expected. On a yearly basis, core PCE inflation stood at 3.0% in August, matching July’s 3.0% reading. The figure was also cooler than economists had projected.
The latest figures therefore show that inflation is still above the Federal Reserve’s 2% target, but some parts of the data were weaker than expected. The Federal Reserve closely watches the PCE inflation measures when deciding where to set interest rates. The central bank has a 2% year-on-year inflation target.
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Fed rate hike in September
The Fed raised interest rates earlier in September as it tried to control inflation that has been driven in part by higher energy costs. The latest inflation report comes as markets and policymakers are debating whether the Fed will need to raise interest rates again before the end of 2026.
New York Fed President John Williams said this week that there may not be an “urgency” to raise rates again immediately in October. His comments have reduced expectations for an interest-rate hike at the Fed’s next meeting. The Fed’s next rate-setting meeting is scheduled for October 27-28.
Fed rate hike outlook
The central bank will then meet again on December 8-9, giving policymakers two remaining scheduled opportunities this year to change interest rates. Despite the more cautious view on an October hike, most Fed officials had earlier projected at least one more rate increase this year.
In the Fed’s latest collection of rate forecasts released in September, all but two of the 18 FOMC officials called for at least one more rate increase this year. That means the latest PCE report does not completely remove the possibility of another rate hike, even though the weaker-than-expected inflation readings could give policymakers more room to wait.
Expectations for an October rate hike have moderated following Williams’ comments, according to the report. Chris Zaccarelli, chief investment officer at Northlight Asset Management, said the data was mixed and suggested that the Fed was probably right to raise rates earlier this month. Zaccarelli also said that if inflation improves further, the Fed could potentially skip a meeting or avoid raising rates three times in a row, which had been a concern among some observers.
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US GDP growth
The latest inflation figures therefore give the Fed two signals to consider: inflation remains above its 2% target, but the latest monthly increases were below expectations. The inflation report also included an update on US economic growth. The Bureau of Economic Analysis revised second-quarter GDP growth up to an annualized 2.2%.
The latest GDP estimate was higher than the previous estimate of 1.5% for April-June, showing that the US economy grew more strongly than initially reported.
US consumer spending
Consumer spending also increased sharply in August, rising 0.9% during the month. That was a major increase from July, when consumer spending had risen just 0.1% after a downward revision.
Consumer spending is important because it is a major driver of US economic activity. The August increase could therefore be a positive sign for the economy as the third quarter comes to an end. However, another recent report showed a weaker side of the US economy. The Conference Board said consumer confidence fell to a nearly 12-and-a-half-year low in September.
Taken together, the latest data shows a mixed economic picture for the Fed: inflation remains above its 2% goal, GDP growth was stronger than previously estimated, consumer spending jumped in August, but consumer confidence fell sharply in September.
For the Fed’s next rate decision, the key issue will be whether inflation continues to improve enough to allow policymakers to wait, or whether inflation remains high enough to support another rate increase later this year.