In August, the inflation index most preferred by the Federal Reserve showed a slight increase compared to the previous month, and the United States is making significant progress in 'fighting inflation'. Could a significant rate cut be expected later this year?

On Friday, September 27, the U.S. Department of Commerce released data showing that the U.S. core PCE price index rose by 0.1% in August, hitting a new low since May, below the expected 0.2% and the previous value of 0.2%; on a year-on-year basis, it rose by 2.7%, reaching a new high since April, in line with market expectations.

The overall PCE dropped to 2.2% year-on-year, the lowest level since March 2021, with an expected value of 2.3%, cooling down from the previous month's 2.5%.

The core personal consumption expenditure price index (excluding volatile food and energy items) increased by 0.1% compared to July, with a year-on-year growth of 2.7%. Calculated at an annualized rate over three months, this index rose by 2.1%, meeting the central bank's target.

Market expectations for a substantial future rate cut are increasing. Interest rate futures traders believe that the likelihood of a 50 basis point rate cut by the Federal Reserve in November is slightly higher than a 25 basis point cut. However, investors are still divided on whether the Federal Reserve will take similar actions.

After the release of US PCE and other data, US equity index futures edged up slightly. Nasdaq index futures rose 0.14% intraday.$S&P 500 Index (.SPX.US)$Futures rose by 0.12%, all reaching pre-market highs.

The 30-year US Treasury yield edged lower.

$USD (USDindex.FX)$Continuing to decline, falling by 0.14%, to 100.425, hitting the lowest level since July 20, 2023.

"Super Core Inflation Indicators" cooled significantly for the second consecutive month, but both income and expenditure growth were lower than expected.

It is worth noting that the 'Super Core Inflation Indicators,' closely watched by the Federal Reserve, excluding housing and energy core service costs, rose by 0.2% for the second consecutive month, maintaining the slowest growth rate in over three years.

Expenditure growth was driven by an increase in service expenditure. Overall service expenditure rose by 0.2%, compared to a 0.1% increase last month, while commodity expenditure remained unchanged after a significant increase the previous month.

Despite significant inflation data, both personal spending and income data have been scrutinized. In August, the growth in income and spending was below expectations.

Among them, personal income increased by 0.2%, the month-on-month growth rate was the smallest since July 2023; adjusted for inflation, real consumer spending rose by 0.1%, the lowest level since January 2024.

Compared with the same period last year, the growth in spending and income has both slowed down.

In August, the savings rate fell to 4.8%. In contrast, the savings rate in July (before revision) was 2.9%.

Despite continued pressure on housing-related costs, progress was still made in August, with the cost rising by 0.5% compared to the previous month, the largest increase since January.

The goal of 'fighting inflation' is not far from the Federal Reserve.

"New Federal Reserve News Agency" Nick Timiraos commented on this month's PCE data, stating that the PCE index favored by the Federal Reserve is getting closer to the Fed's target:

"In the 12 months ending in August, the index rose by 2.2%, not far from the Fed's 2% target. A year ago and two years ago, this index was 3.4% and 6.6%, respectively. Core PCE (excluding volatile food and energy items) rose by 2.7% year-on-year in August. The core inflation rate was 3.8% and 5.4% in the previous 12 months and two years ago, respectively.

"Everything is very calm on the inflation front." Chris Larkin, Managing Director of E-Trade Trading and Investment Director at Morgan Stanley, said.

"Adding today's PCE price index to the list of economic data is in the best position. Inflation continues to remain subdued, although economic growth may be slowing down, there is no sign that it is falling off a cliff."

Economists Stuart Paul, Eliza Winger, and Estelle Ou stated:

"In August, personal income, spending, and inflation data unexpectedly declined, confirming the Federal Reserve's decision earlier this month to cut policy rates by 50 basis points.

Income growth is cooling, helping consumers to choose their consumption habits more cautiously. As potential inflationary pressures ease, we believe the Federal Reserve will increasingly emphasize the full employment aspect of its dual mandate."

Editor/Rocky