Fed Key Inflation Measure Core PCE Falls to 3.9%

Josh Schafer |

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The Federal Reserve's preferred inflation metric grew at its slowest pace on a monthly basis since late 2020. The Personal Consumption Expenditures (PCE) Index grew 3.5% year over year in August, up from 3.4% the month prior and in line with expectations. "Core" PCE, which excludes the volatile food and energy categories, grew 3.9%, down from 4.1% from the month prior, in line with expectations. Month-over-month, core PCE rose 0.1% in August, down from 0.2% in July, and the lowest rate since November 2020. "It's about as good as you could expect," according to Moody's analytics chief economist Mark Zandi. "All the trend lines there look good." Core PCE is the inflation measurement most often mentioned by Fed Chair Jerome Powell, who note earlier that inflation remains "well above our longer-run goal of 2%." The comments came after the Fed maintained rates in a range of 5.25%-5.50%, the highest level since March 2001, while also forecasting holding interest rates higher for longer than anticipated in an effort to tame inflation. Markets are now pricing in a 67.2% chance the Fed doesn't raise rates again this year, up from a 57.7% chance a week ago. August's PCE reading falls in line with the month's Consumer Price Index, another closely watched inflation measure, which also showed cooling core price increases. August's CPI report showed headline inflation was 3.7%, also driven by higher oil and food prices. But Powell acknowledged during the subsequent press conference that a rise in core PCE isn't the only thing that could drive another interest rate hike this year. The Fed is also closely following any economic developments that could stifle inflation's path downward. "The heat that we see in GDP, is it really a threat to our ability to get back to 2% inflation? That's going to be the question," Powell said. "It's not a question about GDP on its own."