In August, inflation in the U.S. economy moved closer to the Federal Reserve’s target, with the personal consumption expenditures price index rising 0.1% for the month and the 12-month inflation rate at 2.2%. This easing inflation may pave the way for future interest rate cuts. The core PCE, which excludes food and energy, also rose 0.1% in August and was up 2.7% from a year ago, indicating a slight increase from July.
Despite positive inflation numbers, personal spending and income both came in below expectations, with a 0.2% increase in income and spending in August. Stock market futures reacted positively to the report, while Treasury yields were negative. The Fed had recently cut its benchmark rate by half a percentage point.
Housing-related costs increased in August, while services prices rose by 0.2% and goods declined by 0.2%. This was the first easing action taken by the Fed since March 2020 in response to the Covid pandemic. Fed officials have shifted their focus from inflation fighting to supporting the labor market, with the possibility of further interest rate cuts later this year.
Overall, the economic data in August landed in a “sweet spot,” with inflation remaining tame and economic growth showing stability. However, the Fed’s move to ease rates indicates a cautious approach to supporting the economy amidst potential challenges.
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