The Federal Reserve’s battle against inflation received a boost recently, as the central bank’s preferred measure of price growth fell to its lowest level since September 2021. This development is encouraging news for investors, as it suggests that the Fed may be less likely to raise interest rates again in the near future.
For months, anxieties about the future of interest rates have been rocking the stock market. However, the latest data on inflation indicates that the Fed may not need to continue raising rates at such a rapid pace. This is a positive development for investors, as it could potentially provide a boost to the stock market.
The core personal-consumption expenditures price index, also known as the core PCE deflator, rose 3.9% year over year in August, down from a revised 4.3% in July. This result was in line with the expectations of economists surveyed by FactSet. Additionally, the core PCE deflator rose 0.1% month over month, down from 0.2% in July and below expectations of 0.2%.
This is the first time in almost two years that the core PCE has fallen below 4%. In recent years, the Fed’s aggressive rate-hiking cycle has been a key headwind for stocks and has contributed to market sell-offs. While the latest data is a positive sign, core PCE still remains almost double the Fed’s 2% target. Therefore, the possibility of another rate hike is still on the table.
Despite the positive news on inflation, there are still challenges ahead. The headline PCE, which includes volatile food and energy prices, tells a less upbeat story, with higher oil prices pushing the cost of living upward. Energy prices increased 6.1% from July, making them the largest contributor to the rise in PCE.
While the Fed has signaled that borrowing costs may need to rise further to sufficiently constrain inflation, some market participants are growing more optimistic about the prospect of rate cuts next year. However, investors should be aware that declaring victory on quelling inflation would be premature.
Overall, the latest data on inflation is a positive sign for investors, as it suggests that the Fed may not need to continue raising interest rates at such a rapid pace. This could provide a boost to the stock market, which has been rocked by anxieties over the future of rates. However, challenges remain, and it is important for investors to monitor future developments closely.