Key inflation gauge shows prices eased in August

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STORY: The battle to tame U.S. inflation crossed a milestone on Friday as data showed the annual rise in prices – excluding food and energy – dropped below 4% last month for the first time in more than two years.

That’s welcome news for the Federal Reserve after 18 months of aggressive rate hikes to bring down prices.

The personal consumption expenditures price index – the Fed’s preferred gauge of inflation – showed that while some inflationary pressures remain, the so-called core PCE – which strips out volatile food and energy prices – rose 3.9% last month on an annual basis, marking the first time since June of 2021 that it was below 4%.

Overall, the annual inflation rate in August stood at 3.5% – which was up slightly from July due to rising oil prices.

The Federal Reserve is aiming for a 2% annual inflation rate.

The Fed kept interest rates unchanged after its meeting last week, but signaled a hawkish tone as it weighs another potential rate hike before year’s end.

Financial markets, however, currently expect the Fed will again keep rates unchanged at its next meeting at the end of October.

Other data from the Commerce Department on Friday showed a rise in consumer spending last month – due in part to the surge in gas prices.

Consumer spending accounts for more than two-thirds of U.S. economic activity. Economists expect it to be strong for the third quarter overall, with third-quarter GDP estimates currently as high as a 4.9%, more than double the second-quarter’s annual GDP rate of 2.1%.