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The Federal Reserve’s recommended measure of U.S. inflation fell more than expected to 2.2% in the year to August, paving the way for the central bank to cut interest rates again in November.
The data on the personal consumption expenditure price index compared with economists’ expectations for an annual rise of 2.3% and July’s figure of 2.5%.
The Fed’s target is a headline PCE inflation rate of 2% per year.
The central bank cut interest rates by 0.5 percentage points last week, the first such cut since the pandemic, and signaled further cuts could follow.
Chairman Jay Powell said the Fed is “doing everything we can to support a strong labor market” while ensuring prices are contained in the wake of the biggest rise in inflation in a generation.
The economy is one of the biggest issues in November’s presidential election, and last week’s interest rate cuts drew criticism from Republican candidate Donald Trump.
Federal funds futures, which cover the next central bank meeting in November shortly after the election, are currently split between investors expecting a quarter-point rate cut or a half-point cut. It suggests that they are divided.
“Even if the Fed wants to cut rates another 50 basis points in November, the inflation numbers won’t stand in their way,” Inflation Insights economist Omile Sharif said in a note Friday. .
However, Thorsten Slok, chief economist at Apollo, argued that the August figure for core PCE, which subtracts volatile food and fuel prices, “predicts a smaller quarter-point cut in November.” “I will.”
The core index rose 2.7%, compared with July’s 2.6% rise, in line with economists’ expectations.
“Overall, inflation trends certainly look better,” Slok added. “Things are moving in the right direction for the Fed.”
The yield on interest-rate sensitive two-year U.S. Treasuries moved inversely to prices, dropping 0.03 percentage point to 3.59% after the figures were released.
Stocks tracking Wall Street’s blue-chip S&P 500 index and the tech-heavy Nasdaq 100 index both rose 0.1% ahead of New York trading. The dollar index fell 0.3%.
The inflation data will allow U.S. Vice President and Democratic White House candidate Kamala Harris to claim that inflation is back to where it was at the start of the Biden administration.
Throughout the campaign, President Trump has accused Harris of presiding over high inflation, which peaked in 2022 and left many American households struggling with the cost of living.
The Fed held off on easing monetary policy earlier this year over concerns that inflation wasn’t falling fast enough and that the labor market was too strong.
However, slowing job creation and falling inflation have created a central bank consensus in favor of lower rates.
Olu Sonora, head of U.S. economic research at Fitch Ratings, said August’s inflation numbers are “unlikely to steer the Fed in a strong policy direction again.” [half-point] It was cut in November.
Additional reporting by George Steer and Jennifer Hughes
