Consumer spending in the U.S. increased by 0.4 percent in August, as reported by the Commerce Department.
The surge in consumer spending last month was partly due to higher gasoline prices, reaching $3.984 per gallon. According to the U.S. Energy Information Administration, it was the highest price for the year and an increase from $3.676 per gallon in July.
July's consumer spending data were revised to show a higher increase of 0.9 percent instead of the initially reported 0.8 percent.
In the 12-month period preceding August, the personal consumption expenditures (PCE) index saw a 3.5 percent rise, slightly surpassing the 3.4 percent increase noted in July. The annual PCE inflation is affected by a lower base comparison from the previous year.
Meanwhile, core PCE showed a year-on-year 3.9 percent increase, marking the first instance since June 2021 of the index falling below the four percent threshold. In the prior month of July, the core PCE had surged by 4.3 percent. The data suggest a decline in underlying inflation pressures.
Ongoing evolution of monetary policy
The Federal Reserve will hold two more rate decision meetings this year. The market expects the Fed to maintain stable interest rates throughout the following year.
Federal fund futures indicated an 80 percent chance that the Fed would not implement a rate hike in November. Meanwhile, the futures predicted a 60 percent probability that the Fed would not impose additional rate hikes this year.
The report on consumer spending and inflation is likely the final official economic data before an anticipated partial U.S. government shutdown starting after midnight on Saturday.
"This report suggests that there's progress on inflation," said Brean Capital senior economic advisor Conrad DeQuadros, as quoted by Reuters. "I think Fed officials are at the point where they're shifting the focus to how long do we keep rates at these high levels, rather than how much higher the rates have to go."
The upcoming publication of the PCE data will become available before the next FOMC meeting. The anticipated monthly core PCE for September will likely remain steady at 0.2 percent for the third consecutive month. This expectation aligns with the Fed's recent pause in rate adjustments.
The 0.2 percent rate is close to the Fed's target and below the present rate, which might reassure Fed officials about not raising rates in November. However, a slight increase of a decimal point could signal an inflation trend shift, potentially prompting bets on a Fed hike.
Regarding the annual core PCE rate, analysts predict it to decrease to 3.8 percent from 4.2 percent, primarily due to base effects. This implies that the price increase this year is less compared to the increase at the same time last year. Hence, the annual rate can decrease while the monthly rate remains constant.
Fueled by anticipations of the U.S. economy outperforming other economies in enduring elevated interest rates, the dollar saw a surge. Analysts say the Fed's recent caution about elevated interest rate levels for an extended duration has spurred the recent rally. On the other hand, several other central banks have said that they are nearing their peaks.