Fed's go-to inflation metric screams more rate cuts
The Fed's favorite inflation gauge is just an inch away from the target, giving the central bank more room to keep trimming interest rates.
In August, the Personal Consumption Expenditures (PCE) rose a mere 0.1% from July, down from the previous month's 0.2% increase. Compared to a year earlier, the index fell to 2.2%, just a hair above the Fed's 2% target.
"Sticky inflation is yesterday's problem," said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.
This cooling trend has already prompted the Fed to act. Earlier this month, the central bank slashed its benchmark interest rate by a hefty half-point, marking a dramatic shift after what felt like an eternity of rate hikes.
However, not everyone at the Fed is ready to go full steam ahead on rate cuts. Tom Barkin, president of the Federal Reserve Bank of Richmond, advocated for a more cautious approach in a recent interview with The Associated Press.
“I’m not yet ready to declare victory on inflation. And so I wouldn’t dial it back all the way,” he said.
Despite promising PCE data, Barkin says he’s not comfortable bringing interest rates down to a point that they no longer restrain economic growth.
Economists call that neutral and that’s typically considered at a rate of 3-3.5%. The Fed’s current benchmark rate is 4.8%. So we're not there yet.
Why the PCE is the data darling of the Fed
So why all the excitement around the PCE? It's the Fed's key inflation yardstick when it comes to how it gauges inflation.
The PCE tracks a wider range of consumer spending than the Consumer Price Index (CPI), including often-overlooked costs like employer-provided healthcare.
It also adapts to our real-world spending habits, noticing when we switch to cheaper alternatives as prices climb.
The PCE comes in two flavors: headline and core. The headline PCE covers all consumer spending, while the core version strips out volatile food and energy prices.
The Fed often zeroes in on the core PCE to get a clearer picture of long-term inflation trends without the noise of volatile gas and grocery prices.
August's PCE data shows encouraging signs. Grocery costs barely rose, while energy prices dropped 0.8%.
Core PCE, excluding food and energy, increased just 0.1% from July to August - the fourth straight month below the Fed's 2% annual target. However, core prices are still up 2.7% from a year ago.
Prices impacting consumer sentiment
Consumer sentiment has been on the upswing as price increases slow down.
The University of Michigan's preliminary figures for this month show consumer sentiment rising for the third consecutive month.
Cooling inflation and brighter outlooks might be chipping away at former President Trump's edge on economic issues.
A recent survey by The Associated Press-NORC Center for Public Affairs Research found people almost evenly split on whether Trump or Vice President Kamala Harris would do a better job handling the economy.