US inflation rises less than expected in August; consumer spending surges

U.S. inflation increased less than expected in August, ​which could see financial markets further reduce the ‌odds ​of another interest rate increase from the Federal Reserve next month.

The Personal Consumption Expenditures Price Index rose 0.3% last month after a downwardly revised 0.1% gain in July, the Commerce ‌Department's Bureau of Economic Analysis said on Wednesday. Economists polled by Reuters had forecast the PCE price index rising 0.4% after a previously reported 0.2% gain in July. In the 12 months through August, PCE inflation advanced 3.4% after increasing by a downwardly revised ‌3.4% in July. PCE inflation was previously reported to have increased 3.7% in July on a year-on-year basis. The BEA changed ‌its methodology for calculating prices for software and accessories, portfolio management fees and legal services in the PCE price index. It also revised the inflation data going back to 2021.

Excluding the volatile food and energy components, the PCE Price Index climbed 0.2% over the month after a downwardly revised 0.1% rise ⁠in July. ​The so-called core PCE inflation ⁠was previously estimated to have gained 0.2% in July. Core PCE inflation increased 3.0% year-on-year in August after a downwardly revised 3.0% advance in July. Underlying inflation was ⁠initially estimated to have risen 3.3% in the 12 months through July.

The US central bank tracks the PCE price measures for its ​2% inflation target. The Fed this month raised its benchmark overnight interest rate to the 3.75%-4.00% range, the first rate hike ⁠in three years, and flagged further increases in borrowing costs in the months ahead. The odds of an October rate hike were diminished by New York Fed ⁠President ​John Williams' comments on Tuesday that he saw "no urgency" for further action. Prior to the inflation data, financial markets priced-in a roughly 51.5% chance of further policy tightening next month down from 70% on Monday, CME's FedWatch Tool showed.

Higher inflation and ⁠borrowing costs could crimp consumer spending. A survey from the Conference Board on Tuesday showed consumer confidence plummeting to a near ⁠12-1/2-year low in September. There are, ⁠however, no signs yet of consumers significantly dialing back. Consumer spending, which accounts for more than two-thirds of economic activity, surged 0.9% last month after a downwardly revised 0.1% gain in July, the ‌BEA said. Spending ‌was previously estimated to have gained 0.2% in July.