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US inflation outlook brightens as underlying price pressures subside

Consumer spending is slowing, which combined with cooling underlying price pressures has raised hopes that the US central bank will not hike interest rates in November. PHOTO: REUTERS

WASHINGTON - Underlying US inflation moderated in August, with the annual rise in prices excluding food and energy falling below 4 per cent for the first time in more than two years, welcome news for the Federal Reserve as it ponders the monetary policy outlook.

The battle against inflation is, however, far from being won as the report from the Commerce Department on Friday showed overall prices were still elevated, partly due to higher gasoline prices.

While the economy remains strong, consumer spending is slowing, which combined with cooling underlying price pressures raised hopes that the US central bank will not hike interest rates in November.

The consumer spending and inflation report is probably the last official economic data release before an expected partial shutdown of the US government due to begin after midnight on Saturday. A lengthy data blackout also could make the Fed reluctant to raise interest rates at its Oct 31-Nov 1 meeting.

“This report suggests that there’s progress on inflation,” said Mr Conrad DeQuadros, senior economic adviser at Brean Capital in New York. “I think Fed officials are at the point where they’re shifting the focus to how long do we keep rates at these high levels, rather than how much higher the rates have to go.”

The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, edged up 0.1 per cent last month. That was the smallest rise since November 2020 and followed a 0.2 per cent advance in July. Economists polled by Reuters had forecast the core PCE price index would climb 0.2 per cent.

In the 12 months through August, the so-called core PCE price index increased 3.9 per cent. It was the first time since June 2021 that the annual core PCE price index was below 4 per cent. The core PCE price index rose 4.3 per cent in July.

Slowing underlying inflation was reinforced by two new price measures, the PCE price index excluding food, energy and housing, and PCE services excluding energy and housing, introduced by the government with the August report.

The PCE price index excluding food, energy and housing also gained 0.1 per cent last month after rising 0.2 per cent in July. PCE services excluding energy and housing inflation rose 0.1 per cent. The so-called super core inflation climbed 0.5 per cent in the prior month. Policymakers are watching the super core price measure as they try to gauge progress in their fight against inflation.

The inflation outlook was also bolstered by a survey from the University of Michigan showing consumers’ 12-month inflation expectations fell to 3.2 per cent this month, the lowest since March 2021, from 3.5 per cent in August. Consumers’ long-run inflation expectations slipped to 2.8 per cent from 3 per cent last month.

But rising oil prices, which are driving the cost of gasoline at the pump, suggest the road to the Fed’s 2 per cent inflation target will be long.

The overall PCE price index increased 0.4 per cent in August after rising 0.2 per cent in July. In the 12 months through August, the PCE price index advanced 3.5 per cent after gaining 3.4 per cent in July. The central bank tracks the PCE price indexes for monetary policy.

Stocks on Wall Street were trading mixed. The dollar fell against a basket of currencies. US Treasury prices rose, with yields retreating further from multi-year highs.

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“Getting (the) year-over-year (core) number below 4% could be a big psychological victory for the bulls and help keep a lid on the 10-year yield,” said Mr David Russell, global head of market strategy at TradeStation.

Consumer spending cooling

The Fed held interest rates steady last week but stiffened a hawkish monetary policy stance. Since March 2022, it has hiked its policy rate by 525 basis points to the current 5.25 per cent to 5.5 per cent range. Financial markets currently expect the central bank will keep rates unchanged at its Oct 31-Nov 1 policy meeting, according to CME Group’s FedWatch tool.

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.4 per cent last month after surging 0.9 per cent in July. That partly reflected higher sales at services stations because of rising gasoline prices. Spending was also lifted by increased outlays on housing and utilities as well as transportation, hospitals and outpatient services.

When adjusted for inflation, spending edged up 0.1 per cent after shooting up 0.6 per cent in July. Consumer spending is expected to have regained speed in the third quarter after slowing in the April-June period, keeping the economy growing.

Spending was supported by incomes, which rose 0.4 per cent amid a 0.5 per cent increase in wages, thanks to a tight labor market. Households also dipped into savings, with the saving rate slipping to 3.9 per cent, the lowest since last December, from 4.1 per cent in July. Rising gasoline prices, declining savings and the resumption of student loans repayments could crimp spending.

The government shutdown, which will leave hundreds of thousands of federal workers furloughed and cut access to food and nutrition assistance programmes for millions of people among the wide range of disrupted services, is seen hurting spending.

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“There is no sign of a major pullback in consumer spending that would signal an impending recession in these numbers, but definitely growing signs of stress as consumers increasingly struggle under the weight of rising energy prices and borrowing costs and moderating income growth,” said Mr Scott Anderson, chief US economist at BMO Capital Markets in San Francisco.

Growth prospects for this quarter were boosted by other data from the Commerce Department on Friday showing the goods trade deficit narrowed 7.3 per cent to US$84.3 billion in August, with exports rising and imports declining. Retailers also increased inventories. Estimates of gross domestic product growth for the third quarter are as high as a 4.9 per cent annualised rate. The economy grew at a 2.1 per cent pace in the second quarter. REUTERS