The Fed's "favorite" inflation gauge continues to cool down! Core PCE in August rose by 0.1%, hitting a new low since May

In August, the inflation index most favored by the Federal Reserve rose slightly month-on-month. The effectiveness of the US "fight against inflation" is significant, is a substantial rate cut expected later this year?

On Friday, September 27th, the US Department of Commerce released data showing that the US core PCE price index rose by 0.1% month-on-month in August, hitting a new low since May, with an expectation of 0.2% and a previous value of 0.2%; it rose by 2.7% year-on-year, reaching a new high since April, in line with market expectations.

The overall PCE fell to 2.2% year-on-year, the lowest level since March 2021, with an expected value of 2.3%, cooling down from the previous month's 2.5%.

The core personal consumption expenditure price index (excluding volatile food and energy items) rose by 0.1% compared to July, with a 2.7% year-on-year increase. Calculated at an annual rate for three months, the index rose by 2.1%, meeting the central bank's target.

Market expectations for a significant rate cut in the future are rising. Interest rate futures traders believe that the likelihood of a 50 basis point rate cut by the Federal Reserve in November is slightly higher than a 25 basis point cut. However, there is still disagreement among investors on whether the Federal Reserve will take similar measures.

After the release of US PCE and other data, US stock index futures edged higher. Nasdaq futures rose by 0.14% intraday, S&P 500 index futures rose by 0.12%, both reaching pre-market highs.

US bond yields edged lower, with the 2-year Treasury yield falling by over 4 basis points intraday, briefly dropping below 3.58% to now stand at 3.594%.

The US dollar index continued to decline, falling by 0.35% intraday to now stand at 100.20, hitting the lowest level since July 20, 2023.

The "super core inflation index" has cooled significantly for the second consecutive month, but income and expenditure growth are both below expectations

It is worth noting that the "super core inflation index" closely monitored by the Federal Reserve— the core service costs excluding housing and energy rose by 0.2% for the second consecutive month, maintaining the slowest growth rate in over three years.

Expenditure growth was driven by an increase in service spending. Overall service spending rose by 0.2%, up from 0.1% growth last month, while goods spending remained unchanged after a significant increase last month.

Although inflation data performed significantly, attention was paid to personal spending and income data. Income and spending growth in August were both below expectations.

Specifically, personal income increased by 0.2%, marking the smallest month-on-month increase since July 2023; real consumer spending, adjusted for inflation, rose by 0.1%, the lowest level since January 2024.

Compared to the same period last year, both spending and income growth slowed down.

In August, the savings rate dropped to 4.8%. In contrast, the savings rate in July (revised) was 2.9%.

Despite continued pressure on housing-related costs, progress was made in August, with this cost rising by 0.5% month-on-month, the largest increase since January.

"Resisting Inflation" is not far from the Fed's target

Nick Timiraos of "New Fed Communications" commented on this month's PCE data, stating that the PCE indicator favored by the Fed is not far from the Fed's target:

"In the 12 months ending in August, this indicator rose by 2.2%, not far from the Fed's 2% target. A year ago and two years ago, this indicator was 3.4% and 6.6%, respectively. Core PCE (excluding volatile food and energy items) rose by 2.7% year-on-year in August. The core inflation rate for the previous 12 months was 3.8% a year ago and 5.4% two years ago."

"Inflation is all quiet on the western front," said Chris Larkin, Managing Director of Trading and Investing at Morgan Stanley E-Trade:

"Adding today's PCE price index to the list of economic data puts it in a prime position. Inflation continues to remain subdued, although economic growth may be slowing down, there are no signs that it is falling off a cliff." Economists Stuart Paul, Eliza Winger, and Estelle Ou stated:

"Personal income, spending, and inflation data unexpectedly declined in August, confirming the Federal Reserve's decision earlier this month to cut policy rates by 50 basis points.

Income growth is cooling, helping consumers to be more cautious in their spending habits. With potential inflation pressures easing, we believe the Federal Reserve will increasingly emphasize the full employment aspect of its dual mandate."