The latest statistics show that the US inflation rate continued to decline in August. This gives hope that the Federal Reserve will continue its interest rate reductions.
Inflation as measured by the Fed, the Personal Consumption Expenditures Price Index (PCE), rose only 2.2% over the past year, down from 2.5% last July.
The Fed has set a 2% inflation target. This represents a significant improvement over the previous rate of February 2021.
Prices rose 0.1% on a monthly basis. This was in line with economists’ predictions.
Inflation “core”, which excludes volatile energy and food prices, increased slightly from July to 2.7% annually.
The core inflation rate remained unchanged at 0.1%. This is the same as July.
Fed officials disagree on future rate reductions
These figures follow a Federal Reserve interest rate reduction of half a point earlier in the month.
This cut was greater than the usual quarter-point change due to signs of a slowing in inflation and conditions on the labour market.
In a CNBC article, Chris Larkin said that the situation on inflation was quiet.
He said that the inflation rate continues to be moderate, but economic growth is not showing any signs of slowing down. He also added:
The PCE Price Index for today is another economic indicator that has landed in the sweet spot. The inflation rate continues to be low, but the economic growth is not falling.
Federal Reserve may reduce interest rates by another half-point in November. Additional cuts are likely to occur in 2025.
Not all Fed officials, however, are convinced.
Fed Governor Michelle Bowman expressed concern that aggressive reductions could “unnecessarily fuel” demand and drive prices up.
Bowman’s cautious approach reflects a measured approach in rate reductions, and an emphasis placed on the Fed’s goal of inflation before further easing.
Fed Governor Christopher Waller, however, has expressed support for larger reductions, citing the August Producer Price Index data (PPI), which indicated a decrease in wholesale prices.
Waller stated that lower PPI figures signaled lower consumer prices for the months to come, justifying the rate cut.
Fed meeting in November: All eyes on it
The August personal income and spending data were below expectation despite the improvement in inflation.
The personal income increased by only 0.2%, which is less than the 0.4% predicted by economists.
The personal spending rate also increased by 0.2%, but fell short of the forecast 0.3%.
The market’s reaction to the report was mixed. The stock market’s futures rose after the report was released, but Treasury yields fell.
This report is a strong argument for rate reductions later in the year. Chris Zaccarelli is the chief investment officer of Independent Advisor Alliance.
The Fed’s focus can be almost exclusively on the labor markets, if inflation is under control. We continue in this direction.
Fed officials are cautious in their approach, trying to balance the need to contain inflation against the desire to help a weakening labor market.
As policymakers evaluate inflation trends against the broader economy, they will continue to debate about future reductions at the upcoming Federal Reserve Meeting.
The August PCE shows a cooling in inflation. Are there more rate reductions on the way? This may change as new information becomes available
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