(Bloomberg) -- The Federal Reserve’s preferred measure of underlying inflation rose at the slowest monthly pace since late 2020, helping to lay the groundwork for policymakers to forgo an interest-rate hike at their next meeting.
The core personal consumption expenditures price index, which strips out the volatile food and energy components, climbed 0.1% in August, according to the Bureau of Economic Analysis report out Friday. A key gauge of services costs watched closely by the Fed also posted the smallest monthly advance since 2020.
Inflation-adjusted consumer spending rose 0.1% last month. On a nominal basis, personal outlays increased 0.4%.
Sustaining low monthly core inflation readings is vital to building confidence among Fed officials that they are winning the inflation battle and creating room to refrain from additional interest-rate hikes.
The S&P 500 opened higher while Treasury yields and the dollar remained lower after the report. Odds of a rate hike at the Fed’s November meeting eased.
After the Fed kept rates unchanged earlier this month, Chair Jerome Powell specifically cited the improving inflation reports.
“We want to see that these good inflation readings that we’ve been seeing for the last three months, we want to see that it’s more than just three months,” he said at the post-meeting press conference.
Services inflation excluding housing and energy rose 0.1%, according to the BEA. The overall PCE price index, meanwhile, jumped 0.4% on a pickup in energy costs.
Friday’s data suggest the Fed’s end-of-year inflation projections from last week are too high.
The figures “reinforce our view that the Fed’s inflation projections are far too pessimistic,” Andrew Hunter, deputy chief US economist at Capital Economics, said in a note.
“Barring a dramatic re-acceleration in that monthly pace, which is unlikely given the cooling labor market and the sharp downturn in housing inflation, we continue to expect core PCE inflation to fall well below the Fed’s 3.7% projection for the end of this year,” he said.
After a burst of spending in the prior two months, the strength of American consumers dissipated in August. While a resilient labor market is helping to support incomes, the cumulative effect of high prices, a rise in gasoline costs and the resumption of student loan payments threaten to cool outlays.
Those developments could help to further limit inflationary pressures but also run the risk of steering the economy closer to a recession.
The report showed inflation-adjusted spending on services rose 0.2%, helped by a pickup in outlays on transportation and recreation. Spending on merchandise fell 0.2%, the first drop since March, as purchases of motor vehicles and home furnishings declined.
What Bloomberg Economics Says...
“Annual revisions to income and spending data suggest households this year have been spending less and saving more than previously believed. That’s characteristic of precautionary saving as households reassess their consumption habits.”
— Stuart Paul and Eliza Winger
For the full note, click here
The report is likely the last major release from the government until lawmakers strike a deal to fund agencies. The government is expected to halt non-essential operations on Oct. 1, the start of the new fiscal year, due to a lapse in funding.
While wages and salaries growth accelerated, real disposable income, the main support to consumer spending, declined 0.2% for a second month. Rising interest payments are also eating into Americans’ paychecks.
Read More: Fed Faces Familiar Foe as Oil Prices Threaten Growth, Inflation
After revisions showed Americans saved more of their incomes earlier this year, the saving rate slipped to an eight-month low of 3.9%. That slowdown suggests the summer pace of spending is less likely to be sustained into this fall.
A recent Fed study showed that after adjustment for inflation, the bottom 80% of houses by income have run out of extra savings and now have less cash on hand than when the pandemic began.
--With assistance from Kristy Scheuble and Augusta Saraiva.
(Adds economist’s comment)
©2023 Bloomberg L.P.