The Federal Reserve's preferred inflation gauge cooled more than expected in August, offering a measure of relief to markets rattled by geopolitical tensions and elevated energy costs. Yet the underlying data, combined with resilient growth and hiring figures, suggests the central bank is far from done tightening policy.
The Personal Consumption Expenditures (PCE) price index rose 3.4% year-over-year in August, down from 3.7% in July, according to the Bureau of Economic Analysis. Economists polled by Dow Jones Newswires and the Wall Street Journal had anticipated a 3.7% increase. On a monthly basis, PCE advanced 0.3%, matching expectations and accelerating from July's 0.2% gain.
Core PCE, which strips out volatile food and energy components, rose 0.2% month-over-month in August, in line with July's pace and below the 0.3% consensus estimate. Annually, core inflation eased to 3.0% from 3.3% in July, also coming in under the 3.3% forecast.
Despite the cooler inflation print, the likelihood of another rate hike before year-end has actually increased. The CME FedWatch tool now assigns a 59.4% probability to a 4% to 4.25% federal funds rate at the December meeting, up from 53% prior to the data release. For the October meeting, the odds of a hike fell to 34.9% from 44.8%, with a 65.1% chance of holding rates steady.
“This is a small relief amid all the doom and gloom, but it's nowhere near enough to pause the rate-hiking cycle,” said Nic Puckrin, macro analyst and founder of Coin Bureau. He pointed to ongoing Middle East tensions, oil prices above $100 per barrel, and record diesel costs as persistent inflationary pressures. “The problem is, the Fed can't hike out of the energy crisis,” he added.
The Fed raised its policy rate to a range of 3.75% to 4% earlier this month in a unanimous 12-0 vote, marking the first increase since July 2023. That prior hike had set the benchmark at its highest level in 22 years. The latest move came after weeks of speculation and signals from officials that they remain vigilant against entrenched inflation.
Supporting the case for further tightening, the Bureau of Economic Analysis also released its third estimate of second-quarter real GDP, showing an annualized growth rate of 2.2%—well above the 1.5% economists had expected. Additionally, the ADP National Employment Report indicated that private employers added 90,000 jobs in September, surpassing the 68,000 forecast.
“The underlying economy proves resilient once again, with Q2 GDP growth revised up to 2.2% alongside a particularly strong Q3 GDP nowcast,” said Adam Hetts, global head of multi-asset and portfolio manager at Janus Henderson Investors. “While today’s inflation data is somewhat better than expected, strong labor and GDP data suggest the print is unlikely to derail consensus expectations for another rate hike before the end of the year.”
For financial advisors, the mixed signals underscore the importance of preparing clients for a higher-for-longer rate environment. The Fed's recent minutes already indicated officials are ready to act if inflation persists. Meanwhile, retirement planning is being affected as inflation erodes savings confidence, and concerns about a retirement crisis have reached 80% among Americans.
