PCE Inflation Drops to 2.2% in August, Lowest Since Feb 2021 – Fed Rate Cut in Focus
PCE inflation fell to 2.2% in August, lowest since Feb 2021. Core inflation rose to 2.7%. Fed weighs another half-point rate cut in November.
Inflation Hits 2.2% Annual Rate, Core Edges Higher
The Personal Consumption Expenditures (PCE) price index—the Federal Reserve's favored inflation gauge—rose 2.2% year-over-year in August, down from 2.5% in July. This marks the lowest inflation reading since February 2021 (1.9%) and brings the Fed closer to its 2% target. The monthly increase was just 0.1%, below the 0.2% seen in July and matching economists' forecasts.
Core PCE, which excludes volatile food and energy prices, accelerated to 2.7% annually from 2.6% in July, in line with expectations. On a monthly basis, core prices rose 0.1%, easing from 0.2% the prior month.
Market and Political Reactions
President Joe Biden hailed the report as a victory, stating that inflation is returning to pre-pandemic levels, while acknowledging more work remains to lower costs. The cooling inflation and softening labor market prompted the Fed to cut rates by a half-point earlier this month—a larger-than-usual move. The latest PCE data suggests another significant cut could be on the table at the November meeting.
However, not all officials are convinced. Fed Governor Michelle Bowman, the sole dissenter in the recent cut, warned that a larger reduction could unnecessarily stoke demand and fuel higher prices. She reiterated that the Fed has not yet achieved its inflation goal.
Waller Points to Wholesale Prices as Key Factor
Fed Governor Christopher Waller cited August's Producer Price Index (PPI) as a key factor in his vote for the larger cut. Wholesale prices rose just 1.7% annually in August, down from 2.1% in July, and are often a leading indicator for consumer prices.
Consumer Behavior and Savings Shift
Despite high interest rates, American consumers are becoming more cautious. Inflation-adjusted spending rose only 0.1% in August, with goods spending flat and services up 0.2%. Kathy Bostjancic, chief economist at Nationwide, noted that a softening labor market and modest wage gains are putting consumers in a defensive posture.
On the positive side, the Commerce Department revised savings data upward: consumers now save about 5% of disposable income, up from the previously reported 3%. While still below the pre-pandemic 7%, Wells Fargo economists said this gives households "a bit more gas in the tank to support consumption."
Outlook for November Rate Decision
Upcoming job reports will likely carry more weight than the inflation data in determining whether the Fed cuts again in November, according to Bostjancic. She added that even another half-point reduction would leave rates high enough to prevent a spending surge that could reignite inflation.