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What did the softer-than-expected inflation data show?

In the U.S., core PCE inflation was reported at 3% year over year in August, below market expectations. According to data from the U.S. Department of Commerce, the personal consumption expenditures price index rose 0.3% month over month and 3.4% year over year in the same month; economists surveyed by Dow Jones had expected the headline reading to come in at 3.7% annually.

Excluding food and energy, the core index rose 0.2% on a monthly basis. Although the Federal Reserve (Fed) officially tracks the headline PCE measure, policymakers consider the core figure more meaningful for identifying longer-term trends; even so, both readings remain above the 2% target.

How did the methodology change affect the data?

The Bureau of Economic Analysis (BEA) changed the calculation method for some components of the index. Revisions in legal services, software, computer accessories and portfolio management pulled the July core PCE reading down by 0.36 percentage points.

How did markets and Fed expectations change?

After the data, U.S. stock futures moved higher while Treasury yields fell. In futures markets, investors reduced the odds of another rate hike at the Fed’s October meeting and priced in the next possible move more heavily for the December meeting.

  • Headline PCE: 0.3% month over month, 3.4% year over year
  • Core PCE: 0.2% month over month, 3% year over year
  • Market reaction: stock futures up, bond yields down

New York Fed President John Williams also signaled after September’s rate increase that there may be no need to rush and that more data could be gathered. Still, Williams indicated that another increase later in the year could remain appropriate, reinforcing market expectations for December.

Other data pointed to resilient demand in the economy

The same report showed personal income rose 0.2% in August, while spending increased 0.9%. Income growth came in below expectations, but the rise in spending beat forecasts, suggesting consumer demand has not weakened completely.

Energy costs stood out in the inflation pressure. Gasoline prices rose 4.4%, transportation services increased 1.4%, and energy goods and services climbed 2.3%, while both goods and services prices rose 0.3% on the month. In addition, U.S. second-quarter economic growth was revised in the final estimate to an annualized 2.2%, while real final sales to private domestic purchasers, a measure the Fed closely watches to gauge demand, increased to 4.6%. Taken together, the data suggest that despite August’s softer-than-expected inflation reading, the Fed may still keep the option of tightening again before year-end on the table.

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