US inflation misses expectations in August amid high energy prices linked to Iran war | Today’s news

US inflation rose less than economists expected in August, while price pressures in July were also revised lower. Softer data could reportedly ease pressure on the Federal Reserve to consider another rate hike in October.

But another rate hike later this year has not been ruled out as a Commerce Department report showed consumer spending jumped in August. The US economy has so far remained resilient despite pressures from the US-Israeli war with Iran, which has pushed up energy prices. Economists had expected inflation to remain high amid record high diesel prices.

After the inflation data, financial markets lowered their expectations for another Fed rate hike next month.

“The bullish price data for August may buy the Fed time to wait for more data and move on Oct. 28, but still elevated inflation and a resilient consumer and economy point to another rate hike before the end of the year,” said Sal Guatieri, chief economist at BMO Capital Markets.

The personal consumption expenditures price index rose 0.3% last month after a downwardly revised 0.1% gain in July, the Commerce Department’s Bureau of Economic Analysis said. Economists polled by Reuters had forecast the PCE price index to rise 0.4% after a previously reported 0.2% rise in July.

Inflation for the month was driven by a 4.4% increase in gasoline prices. Food prices have not changed.

In the 12 months to August, PCE inflation rose 3.4% after rising a downwardly revised 3.4% in July. PCE inflation was previously reported to have increased 3.7% year-over-year in July. The BEA changed the methodology for calculating the prices of software and accessories, portfolio management fees, and legal services in the PCE price index to account for the decline in the year-over-year rate of inflation.

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It also revised inflation data out to 2021. Excluding volatile food and energy components, the PCE price index rose 0.2% for the month, following a downwardly revised 0.1% rise in July. Previously, so-called core PCE inflation was estimated to have risen 0.2% in July.

Last month, it was boosted by a 1.4% jump in the cost of transportation services, as well as solid increases in the cost of restaurant and bar services and hotel accommodations.

Core PCE inflation rose 3.0% year-over-year in August after a downwardly revised 3.0% in July. Core inflation was initially estimated to have risen by 3.3% in the 12 months to July.

The methodology changes reduced core PCE inflation by about 36 basis points, more than the 20-30 basis points that economists had expected. Portfolio management services accounted for the majority of the downgrade.

The US Federal Reserve monitors PCE price measures for its 2% inflation target.

Read also | Inflation not over: Interest rates likely to rise more, Fed warns

“Two months worth of data is not enough to point to a new trend, especially since the monthly data for August accelerated again,” said Stephen Stanley, chief U.S. economist at Santander US Capital Markets. “However, there is at least some reason to be a little more optimistic. At the very least, the Fed can afford to be prudent in its pace and may not have to raise rates too much to steer inflation toward target.”

Rate hike expectations have come back

The Fed this month raised its benchmark overnight rate to 3.75%-4.00%, the first rate hike in three years, and signaled further increases in borrowing costs in the coming months. New York Fed President John Williams’ comments on Tuesday that he saw “no urgency” for further action reduced the chances of an October rate hike.

Read also | Dollar jumps to near two-month high on Fed outlook, inflation worries

Financial markets were pricing in a roughly 41.5% chance of a rate hike at the Oct. 27-28 meeting, down from 51.5% earlier in the day and 70% on Monday, CME’s FedWatch Tool showed. Wall Street stocks were trading higher. The dollar fell against a basket of currencies. US Treasury yields fell.

Higher inflation and borrowing costs could limit consumer spending. A Conference Board survey on Tuesday showed consumer confidence fell to a near 12-1/2-year low in September. So far, however, there are no signs that consumers are calling back. Consumer spending, which accounts for more than two-thirds of economic activity, rose 0.9% last month after a downwardly revised 0.1% gain in July, the BEA said. It was previously estimated that spending rose 0.2% in July.

Adjusted for inflation, consumer spending rose 0.6%, pointing to another strong quarter of growth. Spending already rose at an annualized rate of 3.8% in the April-June quarter, helping the economy grow by 2.2% during the period. Business investment in AI infrastructure also boosted GDP, with equipment spending posting another quarter of double-digit growth.

In addition, gains in AI-related stocks boosted consumer demand as households tapped into their savings and set aside less money for emergencies. Annual revisions to the data showed that households had accumulated more savings than previously estimated and had higher incomes than earlier calculations had suggested, helping to explain the continued strength of consumer spending.

However, income growth remained modest in August, rising 0.2% and after-tax 0.3%. Adjusted for inflation, disposable income was unchanged. The personal savings rate fell to 4.1% from 4.6% in July, the lowest level since November 2022.

“We remain cautious as real labor income slows with higher gas prices, so spending headwinds remain in the coming months,” said Veronica Clark, an economist at Citigroup.

Strong consumer spending could support GDP growth this quarter, but the impact may be offset by a surge in imports as domestic demand remains strong. The Commerce Department’s Census Bureau said the merchandise trade deficit widened 11.5% to $132.6 billion in August, while imports jumped 5.5% to $336.1 billion. Trade has weighed on GDP growth for three consecutive quarters.

“I expect a significant trade drag of around 2.5 percentage points in the third quarter, but given the strength of demand growth, I still see real GDP growth above 3%,” said John Ryding, chief economic adviser at Brean Capital.