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Just when everyone’s gotten comfortable with the idea of rate cut relief arriving in September, a new economic report comes along and pours cold water on those hopes.
The Personal Consumption Expenditures price index rose 2.6% from a year ago, according to the Commerce Department, while core inflation rose 2.9% annually. Although in-line with forecasts, core inflation rose 0.3% from June, and had the highest annual increase since February.
Why it matters: Core inflation, which strips out fickle food and energy costs, is the Federal Reserve’s favorite inflation barometer. Given the latest PCE reading flies high above the Fed’s target rate of 2%, our sympathies go out to Fed Chair Jerome Powell, who is slated to deliver a highly fraught decision on whether the central bank will cut benchmark interest rates at its next meeting September 16–17.
Consumer spending also inched upward this month by 0.5%, while personal income accelerated by 0.4%, both as expected. This suggests that Americans are still opening their wallets, despite tariff-induced higher prices—though some analysts note that consumers bought a lot of cars and not much else last month, skewing spending data.
Still, the odds that shoppers will continue spreading their money around seem to be dwindling: US consumer confidence dropped in August to 58.2 from July’s 61.7, according to the University of Michigan. That’s the first drop in four months, and the lowest reading in three months—a sign that Americans are starting to flinch at the price creep they’re seeing in stores. Over the next year, consumers expect prices to rise by 4.8%, up from 4.5% last month.
The Fed pickle
“The core PCE inflation reading adds complexity to the Fed’s path forward,” Falcon Wealth Advisors founder Jake Falcon told Brew Markets. “While the number was in line with expectations, it still sits above the Fed’s target, which means policymakers may hesitate to cut rates in September despite earlier signals of easing. That said, I believe the Fed is still leaning toward a rate cut, albeit cautiously. I expect a modest rate cut in September, followed by a wait-and-see approach through the year end.”
More crucial data will arrive with next Friday’s jobs report, which will reveal whether cracks in the labor market are healing or deepening.
“Fed policy for the rest of the year is going to be a balancing act between inflation and the health of the jobs market,” said Glenmede Vice President of Investment Strategy Mike Reynolds. “For now, those scales continue to tip toward concern for the latter, absent something completely out of left field over the next few weeks. This supports the base case of two to three rate cuts by year-end.”
In addition to weighing the tradeoffs of high inflation versus a weakening job market, the Fed has been grappling with a new onslaught from President Trump, who tried to fire Governor Lisa Cook. So far, she’s refused to budge, although we’d bet she’s really looking forward to a beer or three over this long Labor Day weekend before she heads back to work next week.—JD