According to the Federal Reserve’s preferred measure of U.S. inflation, prices will likely have been rising a little faster than the bank’s 2% goal in August. However, prices are still going down, which means that interest rates should be lowered even more.
At least that’s what economists on Wall Street agree on before Friday morning, when the August report on consumer spending and inflation is expected.
It is expected that the “core” rate of inflation, which takes fluctuating prices like food and energy into account, will rise by 0.2% and the “headline” rate of inflation will rise by 0.1%. Both readings are about in step with U.S. inflation of 2% per year.
In a report to clients, economists at Nationwide said, “Inflation now looks to be on a sustainable path to the Fed’s 2% goal. There could be some bumps along the way.”
The Fed’s own staff and some experts think the core rate could also go up by 0.1% in August, but not as quickly. That’s why the central bank made the choice last week to cut U.S. interest rates by a large half-point, the first time since 2020.
One thing that could go wrong is that the government changes the PCE inflation numbers every year, going back five years to 2019. It’s not likely, though, that they will show any big shocks.
Inflation could slow down from 2.5% per year to 2.3% per year, which would be the lowest amount since early 2021.
Some traders think the Fed might even reach its goal by January or February of next year.
“We think [the PCE] will end the year around 2.5% and then move toward the Fed’s 2% goal in early 2025,” said Gregory Daco, chief economist at EY Parthenon.
The core rate, on the other hand, might go from 2.6% to 2.7% in the year that finished in August.
Of course, this is bad news for Wall Street, but how badly they react would rely on why the rate went up.
Economists say that a rise is most likely due to the unexpectedly large rise in the cost of housing last month. But recent changes in rents and home prices show that prices have leveled off. This should cause inflation to drop even more in the coming months.
Some top Fed officials, like Chairman Jerome Powell, think that the safety indexes are making the rate of inflation in the U.S. look worse than it really is. One of the most important parts of the government’s main inflation measures is housing.
Cooling in the shelter part of inflation could be made more difficult by the fact that the standard 10-year Treasury yield has gone up by 3.786% since the Fed cut rates so much.
Because benchmark rates are high, it might take a while to reverse the “lock-in effect,” which is when millions of people stay in their homes after getting very low mortgage rates during the pandemic.
Bret Barker, co-head of global rates at TCW, said that the 10-year Treasury yield needs to drop to 3% or even lower for a big wave of refinance to happen. The rate is 3.7% right now.
But as long as rents keep going down, Fed officials are willing to ignore the expensive housing part in order to get a better sense of the real rate of inflation.
Fed President Raphael Bostic wrote in an essay on Monday, “This has been a bit of a mystery, and I hope that some shaky and early signs of a slowing in the rate of housing price increases in the PCE index take root soon.”
