Higher gas prices contributed to overall inflation last month, but there was some good news for the Federal Reserve. Its preferred measure of inflation, the core Personal Consumption Expenditures (PCE) index, rose only 3.9% for the 12 months ended in August, the lowest increase in two years. This is a positive step toward the Fed’s target of 2% inflation. On a monthly basis, the core PCE index grew by just 0.1%, the slowest increase since April 2020.
The overall PCE index, which includes food and energy prices, increased by 0.4% from July and 3.5% annually. This was an acceleration from July, which was largely expected due to higher gas prices. Energy goods and services prices rose by 6.1% in August.
The rising cost of energy is a concern for the Fed, as it can put upward pressure on inflation. Economists estimate that the PCE index will continue to rise due to the increasing cost of energy. Oil prices have also surged recently due to production cuts by Saudi Arabia and Russia.
In addition to higher inflation, consumers also pulled back on spending in August. Consumer spending rose by 0.4% compared to a 0.9% increase in July, while incomes also rose by 0.4%. However, the personal saving rate declined for the third consecutive month, falling to 3.9%, the lowest level since December of last year.
This decline in savings comes at a time when Americans are facing financial challenges. The labor market is cooling, wage growth is moderating, and credit card debt is mounting in a high-interest rate environment. Consumer confidence has also fallen to its lowest level in four months.
Furthermore, student loan payments will soon resume after years of forbearance, which will impact the discretionary income of many individuals. This could lead to a slowdown in consumer spending and delay important milestones like buying a home or saving for retirement.
The Commerce Department’s monthly Personal Income and Outlays reports provide comprehensive data on pricing, income, and spending. However, there is concern that the upcoming government shutdown, scheduled to start on October 1, may disrupt the release of economic data. If a shutdown occurs, key labor market data and other important reports could be delayed, leaving economists and the markets without critical information at a crucial time for the economy.
Overall, the latest inflation and spending data suggests progress toward the Fed’s inflation target, but challenges remain. The rising cost of energy, declining savings, and potential disruptions to economic data due to a government shutdown all pose risks to the economy moving forward.