The Federal Reserve’s primary inflation measure posted a softer-than-expected reading in August, offering some relief to markets rattled by rising bond yields.
The personal consumption expenditures price index rose a seasonally adjusted 0.3% for the month, placing the 12-month headline gain at 3.4%, below the 3.7% economists surveyed by Dow Jones had forecast.
Excluding food and energy, core PCE climbed 0.2% for the month, putting the annual core rate at 3.0%, well under the 3.3% consensus estimate.
The Bureau of Economic Analysis also revised its methodology for measuring prices in several categories, including legal services, software, computer accessories, and portfolio management.
Those revisions lowered the core July PCE level by 0.36 percentage point, contributing to the lighter-than-expected August reading.
“This is good news for investors worried about the recent surge in bond yields, and it bolsters the case for not hiking in October,” said David Russell, global head of market strategy at TradeStation. “However, it’s also relatively old data at this point that doesn’t reflect this month’s surge in diesel prices.”
Stock market futures gained ground following the report, while Treasury yields fell and traders reduced their bets on an October rate hike.
Energy costs were the primary driver of August price increases, with gasoline jumping 4.4%, transportation services accelerating 1.4%, and energy goods and services climbing 2.3% overall.
“Even after major methodological revisions, PCE inflation is still running hot however you cut it,” said Sonu Varghese, global macro strategist at Carson Group. “The economy is running hot, policy remains easy, and the Fed’s challenge is figuring out how much restraint is needed. That’s a tailwind for stocks as we move into Q4.”
“The PCE Inflation data – the Federal Reserve’s favorite – show no progress in August on inflation,” said Heather Long, chief economist at Navy Federal Credit Union. “And it’s inevitable that September will be higher. Meanwhile, American consumers are feeling the squeeze.”
Both the headline and core PCE levels remain considerably above the Fed’s 2% target, keeping a December rate hike firmly on the table.
Personal income rose 0.2% for the month, missing the 0.4% consensus estimate, while consumer spending increased 0.9%, topping the 0.8% forecast.
In a separate report, the Commerce Department said gross domestic product grew at a 2.2% annualized rate in the second quarter, sharply above the prior estimate of 1.5%.
The upward revision reflected stronger contributions from consumer spending, government expenditures, and private investment, painting a picture of a resilient underlying economy.
Real final sales to private domestic purchasers, a metric closely watched by Fed officials, increased 4.6%, an upward revision of 0.4 percentage point from the previous estimate.
New York Fed President John Williams helped temper October rate hike expectations in comments delivered Tuesday, saying policymakers have time before acting again.
“With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information,” Williams said, remarks that almost immediately triggered a market adjustment.
Williams added that another hike “may be appropriate late this year,” reinforcing market expectations that December remains the most likely window for the next move.
