August PCE Inflation Falls to 2.2%, Lowest Since Early 2021; Fed Eyes November Cut
PCE inflation hit 2.2% in August, lowest since Feb 2021. Core rose to 2.7%. Fed may cut again in November as consumer spending slows.
Inflation Eases to 2.2% in August, Core Measure Inches Up
The Personal Consumption Expenditures (PCE) index, the Federal Reserve's primary inflation gauge, rose 2.2% year-over-year in August, the smallest annual increase since February 2021, when it was 1.9%. This compares with a 2.5% rise in July and brings the Fed closer to its 2% target. On a monthly basis, the index rose just 0.1%, below July's 0.2% and matching economists' expectations.
Core PCE, which strips out volatile food and energy prices, climbed 2.7% annually, slightly above July's 2.6%, in line with forecasts. Month over month, core prices rose 0.1%, down from 0.2% in the prior month.
Policy Implications and Fed Divergence
President Joe Biden celebrated the report, saying inflation is returning to pre‑pandemic levels while acknowledging that more work is needed to lower costs. The combination of cooling inflation and a softening labor market led the Fed to cut its benchmark rate by half a percentage 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 agree. Fed Governor Michelle Bowman, the sole dissenter in the recent cut, warned that a larger reduction could unnecessarily stoke demand and keep prices elevated. She reiterated that the Fed has not yet reached its inflation objective.
Waller: Wholesale Prices Were Key to His Vote
Fed Governor Christopher Waller stated that August's Producer Price Index (PPI) was instrumental in his decision to support the larger cut. Wholesale prices rose just 1.7% annually, down from 2.1% in July, and are often a leading indicator for consumer prices.
Consumers Turn Cautious, Savings Revised Up
Despite high interest rates, American households are becoming more careful. 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 making consumers defensive.
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.”
November Outlook: Jobs Data to Dominate
Upcoming job reports will likely carry more weight than 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.
References
