On Friday local time, the Bureau of Economic Analysis of the US Department of Commerce released the PCE Price Index for August. As the most favored inflation indicator of the Federal Reserve, PCE data continued to cool down in August, which should give Fed officials more confidence to continue cutting interest rates.
Specific data shows that the overall PCE price index in August increased by 2.2% year-on-year, with an expected 2.3%, compared to the previous value of 2.5%. This marks another step towards the target of 2% inflation rate, which is also the lowest level since February 2021. The month on month increase in PCE in August was 0.1%, which is in line with market expectations.
The core PCE price index, which excludes the volatile food and energy sectors, recorded an annual rate of 2.7%, fully in line with market expectations, compared to the previous value of 2.6%; The monthly rate of the core PCE price index recorded 0.1%, the lowest since May, and the market expectation was 0.2%.
The pressure of housing related costs continues to exist, with a year-on-year increase of 0.5% in August, the largest increase since January. The overall service price increased by 0.2%, while the commodity price decreased by 0.2%.
After the release of the data, the market's expectation of a significant interest rate cut in the future has heated up. Interest rate futures traders believe that the possibility of a 50 basis point rate cut by the Federal Reserve in November is slightly higher than the possibility of a 25 basis point rate cut.
Last week, the Federal Reserve significantly reduced interest rates by 50 basis points, officially launching a new round of monetary easing. The rate cut was much higher than the level required by the economic situation, which was an unusual move.
In recent days, Federal Reserve officials have shifted their focus from fighting inflation to supporting the labor market, which has shown signs of weakness. At last week's meeting, policy makers stated that they may cut interest rates by another 50 basis points this year and another 100 basis points by 2025, but the market generally expects more aggressive measures.
Despite more progress in inflation, personal expenditure and income data are both lower than expected, indicating that the economic situation is deteriorating. Among them, personal income increased by 0.2%, with the lowest month on month growth rate since July 2023; The actual monthly rate of personal consumption expenditure has increased by 0.1%, reaching the lowest level since January 2024.
In addition, the savings rate is higher than expected, and people have been concerned that consumers are withdrawing their savings to fund their expenses. But as the unemployment rate rises above 4%, the unease in the labor market has triggered a panic of precautionary savings, which will further weaken consumption.
Nick Timiraos, the spokesperson for the Federal Reserve, commented that the PCE data favored by the Fed showed a 2.2% increase in the 12 months ending in August, not far from the Fed's 2% target. A year ago and two years ago, this indicator was 3.4% and 6.6%, respectively. Core PCE increased by 2.7% year-on-year in August. The core inflation rate for the first 12 months of a year was 3.8%, compared to 5.4% two years ago.
Peter Cardillo, Chief Market Economist at Sparta Capital Securities, stated that today's PCE data confirms two things. Firstly, the inflation rate continues to decline, and the overall inflation rate of 2.2% is not far from the Federal Reserve's target of 2%.
Cardillo added that in addition, personal income and expenses were lower than expected, which is another sign that the economy is slowing down. To some extent, this is good news for the market, as it basically indicates that the Federal Reserve will continue to cut interest rates, possibly with another 50 basis point cut before the end of the year