PCE data supports the doves

The August Personal Consumption Expenditures (PCE) report provided a mixed picture for inflation, showing data largely in line with expectations but also underscoring ongoing economic challenges.

The headline PCE Price Index rose by 0.1% month-over-month (MoM), which matched consensus estimates and marked a slight deceleration from the 0.2% increase observed in July. On a year-over-year (YoY) basis, the headline PCE increased by 2.2%, which was slightly below the anticipated 2.3% and a notable decrease from the 2.5% reported in July. This decline in the annual rate offers some support to the dovish camp within the Federal Reserve, suggesting that inflationary pressures are gradually easing.

Core PCE, which excludes food and energy, also showed modest increases. The Core PCE rose by 0.1% MoM, which was lower than the expected 0.2% and also down from July's 0.2% gain. On a YoY basis, the Core PCE rose by 2.7%, in line with expectations and slightly higher than the 2.6% reported in the previous month. The slight increase in core inflation indicates that while overall inflationary pressures may be easing, underlying price growth remains persistent, particularly in key sectors like housing and services.

Personal income data for August was somewhat disappointing, rising by only 0.2%, which was below the consensus estimate of a 0.4% increase and lower than the 0.3% gain recorded in July. The slower income growth may reflect ongoing challenges in the labor market or a reduction in income from assets, which the report noted had decreased. Despite this, disposable personal income (DPI), which accounts for taxes, also increased by 0.2%, providing consumers with a slight boost to their spending power.

Personal spending showed a modest increase in August, rising by 0.2% MoM, but this too was below the expected 0.3% gain and marked a slowdown from the 0.4% increase seen in July. Real consumer spending, which is adjusted for inflation, rose by just 0.1%, down from the 0.4% increase in the previous month. This deceleration in spending growth highlights a cautious consumer environment, particularly as inflation in essential services like housing continues to bite.

The PCE report also indicated shifts within spending categories. Services spending increased by 0.2%, driven by gains in housing and financial services, while spending on goods decreased slightly, led by a drop in new motor vehicle sales. The decline in goods spending could suggest a pullback in consumer demand for durable goods, which had been strong earlier in the year, potentially due to rising interest rates and higher prices.

Overall, the August PCE report does little to dramatically shift the narrative for the Federal Reserve, with the data coming in largely as expected. However, the slight undershoot in headline inflation and core MoM inflation could provide some ammunition for those advocating for a more cautious approach to further rate hikes. Market expectations for rate cuts later in the year remain intact, but this report, while supportive of the dovish view, is unlikely to be a major catalyst for policy change on its own.