US consumer inflation rose less than expected in August, offering some relief to markets while keeping price pressures well above the Federal Reserve’s 2% target.
The personal consumption expenditures price index, the Fed’s preferred inflation gauge, increased a seasonally adjusted 0.3% in August from the previous month, putting the annual increase at 3.4%, the Commerce Department reported Wednesday.
Economists surveyed by Dow Jones had expected monthly and annual increases of 0.3% and 3.7%, respectively.
Core PCE inflation, which excludes volatile food and energy prices and is closely watched by policymakers for underlying price trends, increased 0.2% in August.
The annual core rate stood at 3%, compared with economists’ forecasts of 0.3% and 3.3%.
Although both measures came in below expectations, inflation remains significantly above the central bank’s 2% target.
The prospects of an October rate hike weakened after New York Fed President John Williams said Tuesday that he saw “no urgency” for further policy action.
Ahead of the inflation data, markets were pricing in a roughly 51.5% chance of an October rate increase, down from 70% on Monday, according to CME’s FedWatch Tool.
Energy costs drive August price gains
Energy prices were a major contributor to the increase in consumer prices during August, although several other categories also recorded gains.
Gasoline prices rose 4.4%, while transportation services increased 1.4%.
Energy goods and services overall climbed 2.3% during the month.
The latest inflation figures also came alongside revisions to the methodology used by the Bureau of Economic Analysis to calculate several components of the PCE index.
The immediate impact of those changes on the final inflation readings was not clear.
Economists noted that inflation remains too high relative to the Fed’s target under both the revised and previous methodologies.
The central bank has sought to bring annual inflation down to 2%, but the headline measure has remained above that level for more than five years.
Strong spending adds to economic resilience
The PCE report also showed that consumers continued to spend despite elevated borrowing costs and inflation.
Personal income increased 0.2% in August, while consumer spending rose 0.9%.
Economists had expected income to increase 0.4% and spending to rise 0.8%.
The spending data underscore the continued strength of household demand, which remains a major driver of US economic activity.
US economy grew higher than estimated
Separate Commerce Department data released Wednesday showed the US economy grew at a 2.2% annualized pace between April and June.
The second-quarter GDP reading was revised substantially higher from the department’s previous estimate of 1.5%, although it remained below the 2.5% growth recorded during the January-March period.
Consumer spending, which accounts for about 70% of US economic activity, increased at a 3.8% annualized rate in the second quarter.
That marked a sharp acceleration from the 0.7% pace recorded in the first quarter.
Business investment also contributed to the stronger-than-previously-estimated performance.
“This means the economy continues to expand despite elevated inflation, complicating the monetary policy outlook. The Fed is closely monitoring both spending and inflation data after raising interest rates in September for the first time in three years,” said XTB.
Labor market also shows signs of stability
Another set of data released Wednesday showed that US private-sector employment increased more than expected in September.
Private payrolls rose by 90,000 jobs during the month, according to the ADP National Employment Report, following a downwardly revised increase of 36,000 in August.
Economists surveyed by Reuters had expected private employment to increase by 70,000 jobs.
However, the ADP report has historically been an imperfect guide to the Labor Department’s official employment figures.
Separate data from the Bureau of Labor Statistics showed there were 1.01 job openings for every unemployed person in August, down slightly from 1.06 in July.
Economists have broadly viewed those figures as evidence of a labor market that is cooling without showing signs of a sharp deterioration.
The official September employment report is due Friday.
A Reuters survey of economists expects private payrolls to have increased by 85,000 jobs, while total nonfarm payrolls are forecast to rise by 90,000.
Markets react as Treasury yields retreat
Financial markets initially responded positively to the softer-than-expected inflation readings.
S&P 500 and Nasdaq futures were both up about 0.3% following the data, while Treasury yields moved lower.
The 10-year Treasury yield retreated from its highest level since 2007 and was last at 5.23%.
The 30-year Treasury yield also declined after reaching levels not seen since June 2002.
Higher Treasury yields have weighed on stocks throughout September, with the S&P 500 down 0.2% for the month through Tuesday.
Attention now turns to Friday’s employment report and additional inflation and consumer data due in the coming weeks.
Those readings will provide policymakers and investors with a broader assessment of economic momentum ahead of the Fed’s October 28 policy decision.
For now, the data point to an economy that continues to expand despite elevated inflation and restrictive interest rates, while the below-forecast PCE readings provide some evidence that price pressures may be moderating.
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