The Federal Reserve's primary inflation rate showed that core price pressures cooled further in August even as rising energy prices lifted headline inflation. The S&P 500, which is trying to regain its footing after being knocked by surging Treasury yields, opened solidly higher but reversed lower in Friday stock market action.
Other fresh data showed that personal spending moderated in August, following a burst of spending in June and especially July that had raised alarm among Fed policymakers.
Core Inflation Rate
The personal consumption expenditures, or PCE, price index rose 0.4% in August. The annual inflation rate rose to 3.5% from 3.3% in July.
Typically, Federal Reserve decision-making puts more weight on core inflation, which strips out volatile food and energy prices. Core prices rose just 0.1% in August, while the core 12-month inflation rate eased to 3.9% from 4.2% in July. That latest reading is the lowest since September 2021.
Wall Street economists expected a 0.2% monthly increase in the core PCE price index and a 0.5% gain overall.
Earlier this week, the Commerce Department released revisions of GDP and inflation data which show that the recent disinflationary trend has been even more dramatic. On a 3-month annualized basis, core PCE inflation is running just 2.1%, down from 3.1% in July.
Federal Reserve chair Jerome Powell said last week that he wants to see six months of tame inflation data before policymakers will gain confidence in the current trend. We're not quite there yet, but we could be getting very close. The 6-month annualized core PCE inflation rate eased to 2.9% in August from 3.4% in July.
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Income And Spending
Personal income rose 0.4% on the month, as expected. Personal consumption expenditures rose 0.4% in August, below 0.5% expectations. Adjusted for inflation, consumer spending rose 0.1%.
Fed chair Powell pointed to strong consumer spending as a key reason that policymakers see just one quarter-point rate cut from current levels over the next 15 months.
Supercore Inflation
Starting late last year, Federal Reserve chair Powell shifted the inflation focus to core PCE services excluding housing, or supercore services. That's in keeping with the Fed's view that the tight labor market and elevated wage growth have been at the root of stubbornly high inflation. Wages make up a high percentage of costs for service businesses. Therefore, supercore services inflation should ease as wage pressures moderate.
The August data for supercore PCE inflation confirms that the Fed still has a long way to go to bring down inflation for this category of spending, which includes health care, haircuts and hospitality.
August PCE data for these services showed prices rose a tame 0.14%, but that followed a 0.47% increase in July. Over the past three months, supercore services inflation has run at a 3.4% annualized pace, down from 3.6% in June. The annual inflation rate for these core services eased to 4.4% from 4.75%.
Federal Reserve Rate Hike Odds
After the PCE inflation report, markets were pricing in just 14% odds of a quarter-point Fed rate hike on Nov. 1 and 36% odds of a hike by the Dec. 13 policy update.
S&P 500
The S&P 500 opened 0.7% higher after the PCE inflation report but gave up all its gains, closing down 0.3%. The S&P 500 was aiming for a three-session win streak after the recent pummeling.
The S&P 500 fought back to close slightly positive on Wednesday and rallied 0.6% on Thursday, withstanding a surge in the 10-year Treasury yield to a 16-year-high 4.69%.
But if inflation keeps falling, it will be hard for Treasury yields to hold that level, and a pullback that began intraday Thursday saw the 10-year yield ease to 4.51% early Friday. However, the 10-year Treasury yield firmed to 4.58% as the day progressed.
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