Americans and Federal Reserve officials have news to celebrate: Inflation cooled significantly last month, likely giving central bankers more confidence to continue cutting interest rates.
The Fed’s favorite inflation gauge, the Personal Consumption Expenditures price index, showed consumers paid 2.2% more for goods and services for the year ended in August, versus 2.5% in July. This marks another step closer toward the Fed’s 2% inflation target, as well as the lowest inflation rate seen since February 2021, when inflation clocked in at 1.9%.
The annual increase was below the 2.3% rate economists projected, according to FactSet consensus estimates. On a monthly basis, prices rose 0.1% in August versus the 0.2% increase in July, matching estimates.
That said, “core” inflation, which strips out volatile food and energy prices, rose last month to an annual pace of 2.7% from 2.6% in July. The acceleration was in line with what economists expected.
However, for the month, core inflation inched up by 0.1% in August from 0.2% in July. Economists forecast a 0.2% rise in core inflation last month.
The progress seen in recent months — with inflation getting closer to 2% as well as cooling labor market conditions — pushed central bankers to cut rates by an unusually large half point earlier this month instead of the more traditional quarter-point move. Friday’s inflation report signals that another big cut that helps alleviate borrowing costs for Americans may be on its way.
Still, Fed Governor Michelle Bowman, who was the only one of 12 officials who voted for a smaller cut at the latest monetary policy meeting, expressed concerns that the bigger cut could “unnecessarily” stoke demand, fueling higher prices. “We have not yet achieved our inflation goal,” she said in a statement published last week.
While Bowman may view Friday’s report as a welcome sign, it may not be enough to convince her to vote for a half-point cut at the Fed’s November meeting. But other officials could take it as a sign that they can continue to front-load rate cuts without having to worry as much about inflation.
Meanwhile, Fed Governor Christopher Waller said in a CNBC interview last week that Producer Price Index data from August, which captures prices businesses pay at the wholesale level, pushed him to vote for the larger cut.
The PPI report showed wholesale prices markedly slowed in August to a rate of 1.7% from an annual increase of 2.1% the month before. Wholesale pricing data is generally seen as a precursor to what consumers could expect to pay for goods and services in coming months.
This is a developing story and will be updated.
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