Consumer prices posted a smaller-than-expected increase in August from a year ago, according to the Federal Reserve’s main inflation gauge, the Commerce Department reported Wednesday.
The personal consumption expenditure price index rose 0.3% seasonally adjusted for the month, making the 12-month gain at 3.4%. Economists surveyed by Dow Jones had been looking for increases of 0.3% and 3.7%.
Excluding food and energy, PCE posted a rise of 0.2% which puts the annual core rate at 3%. The estimates are 0.3% and 3.3%.
Although the Fed officially tracks the headline PCE number, officials generally view the core as a better measure of long-term trends.
When the annual increase is less than expected, they came as the Bureau of Economic Analysis changed the way to calculate some components of the index. BEA’s established methodology for measuring prices for legal services, computer software and accessories and portfolio management.
The revision lowered the July core PCE rate by 0.36 percentage points.
Stock market futures gained ground after the report while Treasury yields were negative. Traders priced in the possibility of a Fed rate hike in October, pushing the next expected hike to December.
“This is good news for investors worried about the recent increase in bond yields, and small bolsters for not hiking in October,” said David Russell, global head of market strategy at TradeStation. “However, it is also relatively old data at this point that does not reflect the surge this month in diesel prices.”
The report also showed that personal income rose 0.2% while spending rose 0.9%, against consensus for 0.4% and 0.8% respectively.
Inflation is still high, GDP is revised upwards
Both PCE levels are still above the central bank’s 2% target, raising the possibility that the Fed will follow up its September rate hike with another hike at one of its remaining meetings this year – in October or, more likely, December.
“Even after a major methodological revision, PCE inflation is still hot, but you can moderate it,” said Sonu Varghese, global macro strategist at the Carson Group. “The economy is running hot, policy remains easy, and the Fed’s challenge is to determine if it needs to rein in. This is a tailwind for stocks as we move into Q4.”
Energy costs were the main cause of price increases in August, although some other sectors also showed gains. Gasoline rose 4.4% and transportation services accelerated 1.4%. Energy goods and services increased by 2.3%.
Prices of goods and services both posted 0.3% increase.
“The PCE Inflation data – the Federal Reserve’s favorite – showed no progress in August on inflation,” said Heather Long, chief economist at Navy Federal Credit Union. “And it’s inevitable that September will be higher. Meanwhile, American consumers are feeling the squeeze.”
In other economic news Wednesday, the Commerce Department reported that gross domestic product rose at an annual rate of 2.2% in the second quarter, according to the last of three estimates. That’s up significantly from the previous estimate of 1.5% and reflects a larger contribution from consumer and government spending as well as investment.
Real final sales to private domestic buyers, a metric Fed officials watch closely to measure underlying demand in the economy, rose 4.6%, an upward revision of 0.4 percentage points.
Inflation measures for the April-June period were also slightly lower, with headline PCE prices up 5% and core at 3.3%, each 0.3 percentage points below previous estimates.
For the Fed, various economic signals have caused confusion.
Policymakers can usually see price spikes caused by exogenous factors such as tariffs and the kind of supply shocks driven by the war with Iran. However, the constant rise in prices, coupled with the unknowns of artificial intelligence breakouts, have challenged traditional ways of thinking.
Markets have priced in a strong possibility that the Fed will follow up its September quarter percentage hike with another move in October. However, Tuesday’s comments from influential New York Fed President John Williams dampened those expectations, and Wednesday’s data further dampened the prospect of an October move.
“With the policy action taken at the September meeting, there is no need to rush, and we have time to gather more information,” Williams said in a speech, comments that almost immediately led to an adjustment in expectations.
Williams added that he still thinks another hike “may be appropriate later this year,” with the market targeting the price of the next hike until December.