Federal Reserve’s Fight Against Inflation Shows Progress as Key Indicator Rises Less Than Expected
August 12, 2022
The Federal Reserve’s favored economic indicator for measuring inflation has reported a smaller-than-expected increase in August, signaling that the central bank’s efforts to curb rising prices are making headway. The Commerce Department revealed that the personal consumption expenditures (PCE) price index, which excludes food and energy, rose by only 0.1% for the month. This figure fell short of the 0.2% gain projected by economists in the Dow Jones consensus.
Notably, the 12-month basis shows an annual increase of 3.9% for core PCE, in line with forecasts. While this demonstrates significant inflationary pressures, it also indicates that inflation has not escalated beyond expectations.
This latest reading marks the smallest monthly increase since November 2020, suggesting some improvement in the battle against rising prices.
In addition to the relatively modest inflation gain, consumer spending also exhibited a slowdown. On a current-dollar basis, spending increased by 0.4%, a sharp decline from the 0.9% growth in July. In real terms, however, spending only rose by 0.1% after a 0.6% increase in the previous month.
When including food and energy, the headline PCE recorded a 0.4% increase for the month and a 3.5% rise compared to the previous year. Headline inflation has gradually been edging higher in recent months after reaching 3.2% in June.
The PCE index holds particular significance for the Federal Reserve as it takes into account shifts in consumer behavior, such as the substitution of lower-priced goods for more expensive alternatives. This makes it a more accurate representation of the cost of living than the widely followed consumer price index, which does not account for substitution.
The core PCE reading, which excludes food and energy, is the first sub-4% year-over-year figure in nearly two years. This represents a decline from the 4.3% reading observed in July, potentially indicating a slightly calmer inflationary environment.
Energy costs played a significant role in driving inflation for the month, rising by 6.1% according to the report. Meanwhile, food prices increased by 0.2%. On an annual basis, energy costs actually decreased by 3.6% while food prices increased by 3.1%.
The Federal Reserve aims to maintain inflation at around 2% as a sign of a healthy growth rate for the economy. However, the core PCE has not reached this level since February 2021, indicating that there is still work to be done in achieving the desired stability.
Over the past few months, the Federal Reserve has undertaken a series of interest rate hikes to combat rising inflation. Although the central bank opted to skip a rate hike during its September meeting, it is widely believed that one more quarter-point increase is likely before the year’s end, bringing the total number of increases to a dozen, or a cumulative 5.25 percentage points. Furthermore, several Fed officials have recently stated that they expect interest rates to remain elevated for an extended period.
The latest economic data suggests that the Federal Reserve’s fight against inflation is showing some signs of progress. However, it remains to be seen whether these efforts will be sustained and whether further measures will be necessary to ensure stable economic growth.