Fed’s Preferred Inflation Measure Less Than Expected in August

The Federal Reserve’s preferred inflation measure came in firmly below economists’ expectations last month, new government data show.

August’s annual personal consumption expenditures (PCE) price index was unchanged at 3.4 percent, according to a report released by the Bureau of Economic Analysis on Sept. 30.

The consensus estimate was 3.7 percent.

The July reading was revised downward to 3.4 percent from 3.7 percent.

On a month-over-month basis, PCE inflation rose 0.3 percent, below the market forecast of 0.4 percent.

Stripping out volatile food and energy prices, the 12-month core PCE price index was also flat at a much lower-than-expected 3 percent. Core PCE inflation edged up 0.2 percent, slightly under economists’ forecasts.

Though monetary policymakers depend on a treasure trove of data, the Fed typically relies on PCE as its inflation yardstick. The PCE is broader and updated more frequently than the consumer price index.

Based on these figures, the Federal Reserve was likely correct in raising interest rates for the first time in more than three years, says Chris Zaccarelli, chief investment officer at Northlight Asset Management.

“Given the mixed nature of the data, it shows that the Fed was probably correct in raising rates this month, but if the inflation data improves, they might be able to skip a meeting or at least raise rates less than the 3 times in a row that many were worried about,” Zaccarelli told The Epoch Times in an emailed note.

In addition to the latest readings, the bureau introduced a revised methodology for both the PCE and core PCE price indexes, with the adjustments applied retroactively to early 2021.

The update is intended to more accurately reflect price movements in areas where the previous approach had created distortions.

Officials also plan to incorporate data that was not available for earlier estimates, including federal budget figures, IRS income records, and results from the Census Bureau’s Annual Integrated Economic Survey.

The changes will touch several categories, including computer software and accessories, legal services, and portfolio management and investment‑advice services.

Next Stop: CPI

A tranche of inflation data for September will be released in mid-October, and early outlooks suggest a sizable jump in headline consumer inflation.

The Cleveland Federal Reserve’s Inflation Nowcasting Model suggests the annual inflation rate in the consumer price index (CPI) will be 3.6 percent, from 3.4 percent in August. On a monthly basis, consumer inflation is forecast to surge by 0.5 percent.

Core inflation is still projected to be tamer, with the 12-month rate holding steady at 2.4 percent. From August to September, core CPI is projected to tick up just 0.2 percent.

Global oil markets are the main culprit as they remain elevated, with the U.S. and international benchmarks at $90 and $103 per barrel, respectively. But gasoline and diesel prices are also playing a substantial role across worldwide supply chains.

As of Sept. 30, the national average price per gallon for gasoline and diesel is $4.43 and $6.41, respectively, according to the American Automobile Association.

Stubborn inflation is also weighing heavily on consumer sentiment.

The Conference Board’s September consumer confidence index collapsed to its lowest level in 12 years.

“Americans feel jobs are more scarce and are pulling back on plans for homes, cars, and big-ticket purchases, emitting a warning sign for holiday spending even though layoffs data show employers aren’t yet cutting workers to match the gloom,” Jeffrey Roach, chief economist at LPL Financial, said in an emailed note to The Epoch Times.

Income expectations and views of business conditions also weakened.

Despite deteriorating assessments of the broader economy, consumers are still opening their wallets—and not just for gasoline.

Retail sales came in better than expected last month, signaling robust demand heading into the busy holiday shopping season.

“The evidence therefore points to resilient consumer demand rather than a renewed consumption boom,” economists at Truflation—a real-time inflation measure that relies on multiple data points—said in a report shared with The Epoch Times.

“Consumers remain sufficiently resilient to allow some cost pass-through, but there is less evidence that broad-based excess demand itself is driving the latest inflation acceleration.”