Home Business August Sees Cooling of Inflation Measure Preferred by the Federal Reserve

August Sees Cooling of Inflation Measure Preferred by the Federal Reserve

August Sees Cooling of Inflation Measure Preferred by the Federal Reserve

Federal Reserve officials received more positive news in their fight against rapid inflation on Friday. A key inflation measure continues to slow, indicating that a return to normalcy after the pandemic and higher interest rates are effectively addressing the issue of rapid price increases.

The Personal Consumption Expenditures Index, which the central bank uses to define its 2 percent inflation goal, rose slightly faster last month due to higher gas prices. In August, it increased by 3.5 percent compared to the previous year, up from 3.4 percent in July.

However, when food and fuel costs are excluded, a “core” inflation measure that Fed officials closely monitor is starting to cool significantly. It rose by 3.9 percent from the previous year, down from 4.3 percent in July. Compared to the previous month, it only increased by 0.1 percent, a very slow pace.

This is an encouraging sign for Fed policymakers, who have been raising interest rates since March 2022 to slow down the economy and control price increases. While the economy has remained stronger than expected, the housing market and car market are experiencing less momentum, leading to a decline in key prices such as automobiles and rents. Additionally, supply chain disruptions that caused shortages and price increases in 2021 are gradually resolving, allowing costs for many goods to stabilize or even decrease slightly.

Omair Sharif, founder of the research firm Inflation Insights, stated, “I don’t think they’re fully confident yet that core inflation has sustainably slowed; this is adding another building block on gaining that confidence.”

As progress is made, central bankers are considering whether further interest rate hikes are necessary. They decided to keep rates unchanged at their meeting this month, but they forecasted the possibility of one more rate increase this year. Given the strength of the economy, officials have indicated that they may need to keep interest rates at a high level for longer to ensure a sustainable return to normal inflation.

Jerome H. Powell, the Fed’s chair, mentioned during a news conference that they are now moving more cautiously, taking advantage of the progress they’ve made so far. Mr. Sharif believes that a rate increase in November may be postponed due to the latest inflation report, but an increase in December is still possible if inflation slightly rises again in the coming months.

Market pricing currently indicates a roughly one-third chance of a rate hike in December. Furthermore, longer-term bond yields have been increasing, suggesting that Wall Street is increasingly confident that the Fed will maintain higher policy rates for a longer period. Stocks responded positively to Friday’s report.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, described the report as “very welcome news” and noted the emerging downward trend in inflation. However, the crucial question remains whether inflation can fully fade without causing a significant economic slowdown.

So far, the economy has remained surprisingly strong, with retail sales figures and company earnings calls indicating that consumers are still spending despite higher borrowing costs. However, the report also showed a slight slowdown in personal consumption expenditures in August compared to July.

Historically, it has been challenging for the Fed to lower inflation without causing a sharp economic decline. It often requires a decrease in demand to force companies to stop raising prices. The Fed’s policy is a blunt tool, making it difficult to calibrate accurately.

There are still risks ahead, including a potential government shutdown and auto industry strikes. Additionally, elevated crude oil prices could contribute to inflation if they lead to higher fuel prices.

Nevertheless, as price increases fade and the economy stabilizes, central bankers are hopeful that they can achieve a rare “soft landing” by cooling inflation without causing a significant decline in growth.

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, stated, “We will get inflation back to our target, whatever that takes. But we also can’t lose sight of the fact that the Fed has the chance to achieve something quite rare in the history of central banks: to defeat inflation without tanking the economy.”


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