Fed rate cuts/ inflation cooling/ Fed inflation measure/ interest rate reduction/ Newslooks/ WASHINGTON/ J. Mansour/ Morning Edition/ The Federal Reserve’s preferred inflation measure showed cooling price pressures, with inflation rising just 0.1% from July to August. Year-over-year inflation dropped to 2.2%, near the Fed’s 2% target. This trend supports recent rate cuts, with the Fed signaling more reductions by year-end. Consumers are benefiting from easing inflation, fueling optimism about the economy’s outlook.
Fed’s Inflation Report: Quick Looks
- Cooling inflation: Prices rose just 0.1% from July to August, with year-over-year inflation down to 2.2%.
- Rate cuts expected: The Fed is expected to continue cutting interest rates after last week’s half-point reduction.
- Core inflation: Excluding food and energy, core prices rose 2.7% in the past year, indicating steady easing of inflation pressures.
- Economic outlook: Strong consumer spending, low unemployment claims, and rising consumer sentiment point to sustained economic growth.
Fed’s Inflation Gauge Shows Cooling Prices, Paving Way for Rate Cuts
Deep Look
The Federal Reserve’s preferred inflation gauge, released Friday by the Commerce Department, provided the latest evidence that inflationary pressures are easing, giving the Fed more room to continue cutting interest rates. The Personal Consumption Expenditures (PCE) price index, which the Fed favors due to its ability to reflect changes in consumer behavior, rose just 0.1% from July to August. On a year-over-year basis, the index showed inflation slowing to 2.2%, down from 2.5% in the previous month and moving closer to the Fed’s target of 2%.
This gradual decline in inflation is a sharp contrast to the 2022 inflation peak, where price increases surged to multidecade highs. The Fed responded at the time by raising interest rates aggressively. Now, with inflation retreating, the Fed is reversing course, with last week’s half-point rate cut marking a notable shift in monetary policy.
Core Inflation Shows Continued Progress
Even when excluding volatile food and energy prices, so-called core inflation rose by just 0.1% from the previous month, with a year-over-year increase of 2.7%, slightly above the Fed’s target but still showing signs of cooling. This slow but steady decline in core prices reassures policymakers that inflation is gradually returning to manageable levels.
Fed Plans More Rate Cuts
Given these promising inflation numbers, the Fed has hinted at further rate cuts in the near future. The central bank has already reduced its benchmark interest rate by a half-point in September, a larger cut than typical. Fed officials have signaled the possibility of another half-point rate reduction in November, followed by a similar cut in December, to help support economic growth while keeping inflation in check.
In addition, four more rate cuts are expected in 2025, along with two more in 2026, reflecting the Fed’s confidence that inflation will remain subdued.
The PCE Index vs. CPI
The Fed’s preferred inflation gauge, the PCE price index, differs from the more widely known Consumer Price Index (CPI) in its approach. The PCE index accounts for shifts in consumer behavior, such as switching from name-brand to store-brand products when prices rise, providing a broader picture of price changes. Because of these adjustments, the PCE index typically reflects a lower inflation rate than the CPI, which gives more weight to fixed costs like housing and rent.
Economic Growth and Consumer Resilience
Recent reports suggest that the U.S. economy remains robust, growing at an annualized rate of 3% from April to June, largely driven by consumer spending and business investment. Despite high borrowing costs and three years of excess inflation, American consumers continue to spend, particularly on retail goods, suggesting confidence in the economy’s outlook.
Additionally, the job market remains strong, with unemployment benefit applications recently falling to their lowest levels in four months. Combined with rising consumer sentiment and improved expectations for long-term goods purchases, these indicators suggest that the economy is not only weathering inflation but thriving.
Improving Consumer Sentiment
Sentiment among American consumers has also improved in recent months. A University of Michigan report noted that consumer confidence has risen for three consecutive months, driven by optimism around “more favorable prices” for items like cars, appliances, and furniture. With inflation stabilizing and the Fed reducing rates, many consumers are feeling better about their financial prospects.
In addition, the cooling inflation appears to be shifting voter perceptions on the economy. A recent AP-NORC survey showed that voters are now more evenly split on whether former President Donald Trump or Vice President Kamala Harris would handle the economy better, a notable change from previous polling that showed Trump with a significant edge. This shift suggests that Harris may be distancing herself from President Joe Biden’s earlier struggles with inflation.
What’s Next?
As inflation continues to cool, the Fed is expected to pursue additional rate cuts through the end of 2024 and into 2025. The combination of easing price pressures, strong economic growth, and resilient consumer spending paints a positive outlook for the U.S. economy, despite recent challenges. However, the Fed will remain cautious, ensuring that inflation stays under control without overheating the economy.
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