Fed's Preferred Inflation Gauge Comes In Below Expectations For August, Easing Concerns About Rising Prices

The Federal Reserve’s preferred measure of inflation in August came in below expectations, showing a decline from July’s inflation rate.

According to government data released Friday, the Personal Consumption Expenditures (PCE) Price Index increased by 2.2% in August compared to the same period last year. The reading was below the 2.3% analysts were expecting and a drop from July’s 2.5%.

The core PCE, which excludes volatile food and energy prices, was 2.7% year-over-year in August, matching analyst expectations and 0.1% higher than July’s number.

Personal Income And Outlays For August: Key Highlights

• Personal income increased by $50.5 billion (0.2%) in August, with disposable personal income up $34.2 billion (0.2%) and personal consumption expenditures up $47.2 billion (0.2%).
• The PCE price index rose 0.1% in August, with a 0.1% increase in core inflation excluding food and energy. Real DPI and real PCE both increased by 0.1%.
• Goods spending decreased by $7.6 billion, while services spending surged by $54.8 billion, primarily in housing and financial services. Motor vehicle purchases saw the largest decline in goods.
• The PCE price index is up 2.2% year-over-year, with a 2.7% increase excluding food and energy. Energy prices fell by 5%, while food prices rose by 1.1%.
• Personal saving rate stood at 4.8%, with personal saving totaling $1.05 trillion in August. Personal outlays increased by $48.3 billion.

Market Reactions

The U.S dollar index, as tracked by the Invesco DB USD Index Bullish Fund ETF UUP, rose 0.2% after the release.

Futures on major U.S. equity indices soared in premarket trading Friday. Contracts on the S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY, were 0.22% higher. Futures on the tech-heavy Nasdaq 100 rose 0.3%, while futures for the Dow Jones Industrial Average, tracked by the SPDR Dow Jones Industrial Average ETF DIA, were 0.17% higher premarket.

Services Drive Inflation Upward

In August, the key drivers of inflation primarily stemmed from an increase in the cost of services, particularly in the housing, financial services, and insurance sectors. These categories saw the most significant price growth, contributing to the overall PCE index rise. Spending on services continued to rise, reflecting both higher demand and increasing service costs. On the other hand, goods experienced a slight decline in prices, which somewhat balanced out the overall inflationary pressure.

Energy prices, particularly for gasoline and other energy-related goods, continued their downward trend in August, moderating overall inflation. Energy prices fell significantly compared to the same time last year, which helped to temper the impact of rising prices in other categories. This was in stark contrast to earlier periods when energy costs had been a more substantial inflationary driver.

Food prices saw a modest increase in August, though their contribution to inflation was relatively mild compared to other categories. The food sector’s price rise was driven mainly by off-premises consumption, such as groceries, while restaurant and dining prices remained more stable. These food price increases, while noticeable, did not have as large of an impact on overall inflation as the service sector did.

Core inflation, which excludes the volatile categories of food and energy, remained steady. This was largely due to persistent price increases in durable goods, like automobiles, and ongoing inflation in service categories. Even though goods prices decreased slightly, the overall inflationary trend was influenced by steady price pressures in essential service sectors, contributing to the sustained core inflation rate in August.

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