The Federal Reserve's preferred inflation gauge, the personal consumption expenditures (PCE) price index, rose less than markets expected in August on an annual basis.
Headline PCE, which includes food and energy, rose 3.4% from a year earlier in August, while core PCE, which excludes food and energy, gained 3.0%, according to the Bureau of Economic Analysis (BEA), part of the U.S. Commerce Department, on the 30th. Both figures fell well short of the 3.7% and 3.3% expected in a Bloomberg survey of economists.
The shortfall was attributed in part to the BEA's overhaul of how it measures spending on software, investment management and legal services. The revised methods were applied retroactively to data from the past five years, and the changes appeared for the first time in the PCE data released on the 30th, timed to the agency's annual revision cycle in September. Economists estimated that core PCE growth would come in 0.2 percentage points lower under the new methodology, according to The Wall Street Journal.
Even so, the PCE index remains far above the Fed's 2% inflation target, keeping the prospect of further rate increases alive. With inflation showing some easing, however, more market participants now expect the Fed to raise rates in December rather than October.
On a monthly basis, headline PCE rose 0.3% and core PCE 0.2%, matching or coming close to market expectations. The main driver of August inflation was higher energy costs stemming from conflict in the Middle East. Gasoline prices rose 4.4%, transportation services 1.4%, and energy goods and services 2.3%. Consumption also held firm. Consumer spending, which accounts for more than two-thirds of economic activity, increased 0.9% last month, a sharp acceleration from July's 0.1% gain.
Separately, the final reading of second-quarter U.S. gross domestic product released the same day showed growth of 2.2% at an annualized rate from the previous quarter, revised up from the preliminary estimate of 1.5%.
