The latest inflation report showed continued cooling in price pressures, providing a positive sign for the economy.
A good set of US data today with PCE inflation falling to 2.2%, core to 2.7% and consumer sentiment improving to a 5-month high.
These numbers will reinforce what is already a strong market consensus of a favorable soft landing for the economy.#economy #inflation #growth— Mohamed A. El-Erian (@elerianm) September 27, 2024
The Personal Consumption Expenditures (PCE) index, which is favored by the Federal Reserve, rose only 0.1% in August, meeting economists’ expectations. Over the past 12 months, inflation slipped to 2.2% from 2.5%, marking the lowest level since early 2021.
The core PCE index, which excludes volatile food and energy prices, also increased by 0.1%, slightly below the forecast.
On the data front, and ahead of the US PCE release which includes what is known as the Federal Reserve’s favorite inflation measure:
August CPI inflation in France and Spain was lower than the expected 1.9% for both.
Helped by lower energy and a more muted services component,… pic.twitter.com/aZPcCaDsSh— Mohamed A. El-Erian (@elerianm) September 27, 2024
The core rate rose marginally to 2.7% from 2.6% in July over the past 12 months, but this uptick is not expected to persist. The data suggests that while prices are still rising, the rate of increase is slowing down.
US PCE Inflation moved down to 2.2% in August, the lowest level since February 2021. The market is now pricing in another 75 bps in Fed rate cuts before the end of the year.https://t.co/rQuXrxVpWs pic.twitter.com/9wtlPCu83i
— Charlie Bilello (@charliebilello) September 27, 2024
This eases the economic pressure on consumers and enhances the possibility of more interest rate cuts by the Federal Reserve in the near future. The slight rise in prices indicates that inflation’s impact is lessening, which could provide relief to consumers and businesses. The Federal Reserve’s ongoing efforts to manage inflation through interest rate adjustments appear to be making progress.
Cooling inflation’s impact on rates
The cooling inflation has cemented growing conviction that the Fed can achieve a “soft landing” as it embarks on a rate-cutting campaign. The PCE reading appeared to boost bets on another large rate cut from the Fed next month, with more than half of traders anticipating a 50 basis point cut.
However, the fresh inflation reading also suggests that the Federal Reserve might opt for smaller rate cuts this fall, likely in 25 basis point increments. The result means that a bigger 50 basis point cut may be hard to justify at the Fed’s next meeting in November unless the labor market shows substantial weakness. As September gives way to October, new jobs numbers will play a huge role in setting expectations for the days ahead.
The September jobs report, scheduled to arrive on Friday, will offer the latest snapshot of the labor market. Should unemployment come in line with expectations, it will likely paint the Fed in a favorable light. If jobs numbers come in worse than expected, it will fuel critics who have argued that the Fed acted too slowly in cutting rates.
Fed Chair Jerome Powell is set to offer remarks ahead of the jobs report on Monday, as investors look for signals on the central bank’s next move.
