The Federal Reserve’s preferred inflation gauge in August came in cooler than expected — likely delaying another interest-rate hike until December.
The core PCE price index, which excludes volatile food and energy prices, rose 0.2% over the month at a 3% annual rate, the Bureau of Economic Analysis said Wednesday. That came in tamer than estimates of a 0.3% monthly pace and a 3.3% yearly rate.
Overall PCE rose 0.3% over the month at a 3.4% annual rate, also below estimates of a 3.7% yearly rise.
Economists had been expecting a dip in the monthly inflation reading, since the BEA adjusted its methodology for how it measures prices for legal services, software and computer accessories and portfolio management this month. It’s unclear how much of the change in the monthly figures is from the data collection tweak and from actual price softening.
The Fed will receive two more inflation reports – September’s Consumer Price Index and Producer Price Index – before its next meeting on Oct. 28. But officials prefer to look at the core PCE since it filters out temporary shocks, like the energy crisis amid the war in Iran, making it a better measure of long-term trends.
Chris Zaccarelli, chief investment officer at Northlight Asset Management, said in a Wednesday note that while inflation came in lower, it still remained far above the Fed’s 2% goal. In the meantime, another batch of data out Wednesday showed the job market and economic growth remained resilient.
“Given the mixed nature of the data, it shows that the Fed was probably correct in raising rates this month, but if the inflation data improves they might be able to skip a meeting or at least raise rates less than the three times in a row that many were worried about,” he wrote.
Stocks rose after the economic releases, though only modestly. Zaccarelli noted that a strong earnings season and “getting past the midterm elections” could help markets reach new highs before the end of the year.
The Dow Jones Industrial Average slumped more than 400 points, or 0.9%, while the S&P 500 slipped 0.3%. The Nasdaq closed up 0.2%.
The odds of a quarter-point rate hike at the Fed’s October meeting dropped to 37% after the data, down from roughly 45% earlier in the morning.
Most traders priced in a second rate hike at the Fed’s December meeting. Investors argued the inflation data could give the Fed more breathing room, and that officials will want to avoid coming off as politicized by raising rates just before the November midterms.
Energy costs were the major culprit behind the monthly rise in prices, as supply disruptions amid the Middle East conflict have pushed gasoline prices stubbornly above $4 a gallon. Gasoline jumped 4.4% in August, according to the BEA.
Transportation services also rose 1.4%. The overall energy goods and services category jumped 2.3%, while goods and services each increased 0.3%.
A GDP report released Wednesday showed the economy grew at a 2.2% annualized pace in the second quarter, up sharply from a previous estimate of 1.5% due to higher consumer and government spending, as well as increased business investment.
Real final sales to private domestic purchasers – a gauge the Fed looks at to measure underlying demand in the economy – jumped 4.6%, an upward revision of 0.4 percentage point.
The ADP’s National Employment Report on Wednesday also revealed private employment increased by 90,000 jobs in September, after a downwardly revised 36,000 in August – a sign the labor market is still chugging along.
It’s enough to keep the Fed focused on inflation, as the economy continues to grow and add jobs at a steady, if tepid, pace.
