Home Business US inflation outlook brightens as underlying price pressures subside

US inflation outlook brightens as underlying price pressures subside

by Mark Mendoza

Consumer spending in the U.S. saw a 0.4% increase in August, according to a report from the Commerce Department. This is a slight slowdown from the 0.9% surge observed in July. The moderation in consumer spending growth, combined with a slight decrease in underlying inflation, could help alleviate concerns about potential interest rate hikes by the Federal Reserve.

The report showed that the core personal consumption expenditures (PCE) price index, which excludes food and energy prices, rose by 0.1% in August. This was the smallest increase since November 2020 and was below economists’ expectations of a 0.2% rise. The core PCE price index also fell to 3.9% on an annual basis, marking the first time it has been below 4.0% in more than two years.

While the moderation in underlying inflation is positive news for the economy, overall prices still remain elevated, largely due to higher gasoline prices. However, the slowdown in consumer spending growth, combined with cooling underlying price pressures, has raised hopes that the Federal Reserve will not raise interest rates in November.

Conrad DeQuadros, senior economic advisor at Brean Capital in New York, noted that this report suggests progress on inflation, shifting the focus of Fed officials to how long they should keep rates at high levels rather than how much higher they need to go.

The report also revealed that personal income rose by 0.4% in August, supported by a 0.5% increase in wages. However, the savings rate dipped to 3.9%, the lowest since last December, indicating that households are dipping into their savings to support spending. Rising gasoline prices, declining savings, and the resumption of student loan repayments could potentially constrain consumer spending in the future.

The data blackout caused by the expected partial government shutdown, which is set to begin after midnight on Saturday, might make the Federal Reserve hesitant to raise interest rates at its upcoming October-November meeting. The shutdown will leave hundreds of thousands of federal workers furloughed and disrupt services, including food and nutrition assistance programs.

Despite the potential slowdown in consumer spending, the growth prospects for the third quarter are still promising. Other data from the Commerce Department showed that the goods trade deficit narrowed by 7.3% in August, with an increase in exports and a decline in imports. Retailers also increased their inventories, leading to estimates of gross domestic product growth as high as a 4.9% annualized rate for the quarter.

Overall, the report suggests that while there are signs of a moderation in consumer spending and underlying inflation, the economy remains strong. The Federal Reserve will closely monitor these developments as they make decisions regarding interest rate hikes and monetary policy.

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