Core Inflation Holds Steady at 2.9% in August, Fed’s Inflation Gauge Signals Stable Outlook

Core inflation in the U.S. held steady at 2.9% for the year ending in August, matching expectations, according to the Federal Reserve’s preferred measure of inflation. The latest data from the Personal Consumption Expenditures (PCE) price index, released by the Commerce Department, also revealed a modest increase of 0.2% for the month. This marks a continuation of the trend where inflation remains well above the Federal Reserve’s long-term target of 2%, but within a range that doesn’t trigger immediate policy shifts.

The report indicated that headline inflation, which includes volatile food and energy prices, was slightly higher at 2.7% year-over-year, up from 2.6% in July. This small uptick was driven by higher prices in specific sectors such as food, energy, and housing. However, the core PCE — which excludes these categories — stayed firmly at 2.9%, a figure that aligns with the central bank’s expectations and its ongoing strategy of gradual rate cuts.

Impact on Fed Policy: No Immediate Shift Expected

The core inflation figure reinforces the Federal Reserve’s cautious approach to rate adjustments, with policymakers likely maintaining their stance of further easing in the months ahead. The central bank’s decision to cut its benchmark interest rate by 0.25% last week to a target range of 4%-4.25% was driven, in part, by a desire to support the economy amidst persistent inflationary pressures. While the core PCE remains slightly above the Fed’s target, it has been relatively stable, which offers reassurance that inflation isn’t spiraling out of control.

The Federal Reserve uses the PCE price index as its preferred inflation gauge due to its broader scope, incorporating changes in consumer spending patterns, unlike other metrics like the Consumer Price Index (CPI). As a result, it provides a more comprehensive view of inflation dynamics, especially given its flexibility to adjust for shifts in consumer behavior. Even with inflation remaining elevated, Fed officials are signaling that they expect to implement two additional quarter-point reductions before the end of the year, a move aimed at further supporting economic activity without igniting runaway inflation.

Consumer Spending and Income Show Strength Despite Challenges

While inflation remains a concern, consumer spending has proven resilient. The report indicated that personal income increased by 0.4% in August, above analysts’ expectations, while personal consumption expenditures (PCE) accelerated at a 0.6% pace. These numbers signal that consumers are continuing to spend, despite challenges like tariffs and high living costs, which is helping to sustain economic momentum.

Chris Rupkey, Chief Economist at Fwdbonds, noted that consumer spending was particularly strong during the summer months, a period marked by what some analysts are calling “revenge spending.” After months of hesitation driven by fears surrounding tariff impacts, consumers have returned to the market with increased confidence, fueling a surge in retail and durable goods spending.

Furthermore, the personal savings rate also increased slightly to 4.6%, a positive sign of financial resilience amid higher consumer costs. The overall spending environment suggests that the U.S. economy is not facing a sharp slowdown, despite ongoing inflationary pressures.

The Role of Tariffs and Their Limited Impact on Long-Term Inflation

The data also sheds light on the impact of tariffs, which have been a hot topic in economic discussions. While there was initial concern that President Trump’s tariffs on imports would sharply increase prices across the board, the actual pass-through effect on consumer prices has been more limited than many economists predicted. Goods prices rose only slightly by 0.1% for the month, and services prices edged up 0.3%, suggesting that businesses have managed to absorb some of the tariff costs through inventory adjustments and cost-cutting measures.

Federal Reserve Chairman Jerome Powell and other central bank officials have expressed the view that the tariffs are more of a one-time shock to prices, rather than a long-lasting inflationary driver. This could mean that while prices rise temporarily due to tariffs, their effect on long-term inflation may be less pronounced than initially feared.

Market Reactions: Modest Gains as Economic Data Holds Steady

The stock market responded positively to the report, with futures adding to their earlier gains, and Treasury yields dipping slightly as investors adjusted to the stable inflation outlook. While markets have been eagerly anticipating more rate cuts, the consensus remains that a cautious approach will continue, with some analysts predicting further easing if economic conditions warrant it.

The current economic data points to moderate inflation, with areas like housing costs continuing to contribute to price increases. Housing, which has been a key source of rising costs, posted a 0.4% increase in prices. While this remains a manageable level, it suggests that the Fed will need to keep a close eye on the housing sector, as it could signal longer-term inflation pressures if housing affordability continues to erode.

Looking Ahead: The Path of Inflation and Interest Rates

Although the core inflation rate remains steady at 2.9%, the Federal Reserve is maintaining its flexibility, preparing to further lower rates to help stimulate growth without triggering excessive inflation. The prospect of two more rate cuts by the end of the year is likely to bolster economic growth in the short term, but the Fed’s long-term challenge will be to balance growth with inflation control.

In the coming months, economic data will continue to be closely scrutinized for signs of inflationary trends or shifts in consumer behavior that could necessitate policy adjustments. However, for now, the stable inflation rate and resilient consumer spending point to a steady economic path, with mortgage rates and other borrowing costs likely to remain manageable as the year progresses. For direct financing consultations or mortgage options for you visit 👉 Nadlan Capital Group.