WRAPUP 1-US inflation rises below expectations in August; consumer spending robust

US inflation increased less than expected ‌in ​August and price pressures were more moderate in the prior month than previously reported, likely reducing the urgency for the Federal Reserve to raise interest rates again in October. Another rate hike this year, however, remains on the table as the report from the Commerce Department on Wednesday showed consumer spending surging last month. The economy so far appears to be ‌holding up despite headwinds from the US-Israeli war with Iran, which has raised energy prices, with diesel prices at record highs. Financial markets knocked down bets for a rate increase next month.

"The less-than-feared price data for August may buy the Fed time to await more data and pass on October 28, but still-elevated inflation and a resilient consumer and economy point to another rate hike by year-end," said Sal Guatieri, a senior economist at BMO Capital Markets. 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. 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. OCTOBER RATE HIKE ODDS DIMINISH

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.

Financial markets priced in a roughly 34.9% chance of an increase in borrowing costs at the October 27-28 meeting, CME's FedWatch Tool showed. That was down from 51.5% before the inflation data and 70% on ⁠Monday. US stocks rose. The dollar slipped against a basket of currencies. US Treasury yields fell. 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. When adjusted for inflation, consumer spending rose 0.6%. Spending is on track to post another robust quarter of growth after rising at a 3.8% annualized rate in the April-June quarter, and helping to drive the economy to a 2.2% growth pace during that period. Gross ⁠domestic product was also supported by business investment related to the buildout of AI infrastructure, with business spending on equipment posting another quarter of double-digit growth.

Consumer spending is also being underpinned by AI-driven stock market gains as well as ⁠households tapping into their savings and setting aside less money for ⁠a rainy day. Personal income rose 0.2% in August. Income at the disposal of households after accounting for taxes increased 0.3%. Disposable income was, however, flat after adjusting for inflation. The saving rate dropped to 4.1% last month from 4.6% in July. Annual revisions, however, showed households had more savings than previously estimated.

"The middle- and lower-income households, for whom income ‌is so critical to spending power given the ‌lack of financial assets, have been under less financial pressure than feared," said James Knightley, chief international economist at ING. (Reporting ​by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci )