The Federal Reserve’s core inflation rate has shown a further cooling of price pressures in August, even as headline inflation was lifted by rising energy prices. The S&P 500 initially opened higher but reversed its gains in Friday afternoon trading. Fresh data also indicated that personal spending moderated in August, following a surge in June and July that had concerned Fed policymakers. The personal consumption expenditures (PCE) price index rose by 0.4% in August, resulting in an annual inflation rate of 3.5%, up from 3.3% in July. However, core prices, which exclude volatile food and energy prices, only rose by 0.1% in August, with the 12-month inflation rate decreasing to 3.9% from 4.2% in July.
While Federal Reserve Chair Jerome Powell has expressed the need for six months of low inflation data before gaining confidence in the current trend, it appears that the economy is heading towards a soft landing. Personal income rose as expected by 0.4% in August, while personal consumption expenditures rose 0.4% as well, slightly below expectations. Adjusted for inflation, consumer spending increased by 0.1%. However, the Fed may still have a way to go in bringing down inflation for supercore services, as the August data showed a moderate increase in prices following a larger increase in July. The annual inflation rate for these core services eased to 4.4% from 4.75%.
Following the release of the PCE inflation report, markets have priced in a 17% chance of a quarter-point Fed rate hike on November 1st, and a 34% chance of a hike by the December 13th policy update. The S&P 500 initially opened higher, but eventually traded down in the early afternoon, potentially due to concerns about the impact of falling inflation on Treasury yields. However, if inflation continues to decline, it may be difficult for Treasury yields to maintain their current level. Overall, it appears that the economy is showing signs of a soft landing and investors are closely watching inflation data for further guidance.