Although lumber costs are lower now than they were a few years ago, the economy is still struggling with inflation.
The data: Although a crucial indicator of inflation increased somewhat in August, it was not high enough to indicate that much larger increases linked to U.S. tariffs were imminent.
Top Fed officials are expected to be reassured by the most recent price report that inflation is still mostly under control, even if it has been rising since the spring due in part to much increased U.S. tariffs.
The Bureau of Economic Analysis said on Friday that the PCE index, the Fed’s favored inflation indicator, increased by 0.3% in August.
The so-called core price index, which excludes food and gas, is given more weight by the Fed. It increased by a somewhat slower 0.2% and was in line with the Wall Street prediction.
The 12-month inflation rate increased slightly to 2.7%, over the Fed’s long-term target of 2%.
Core inflation remained constant at 2.9% annually. Future inflation can be more accurately predicted by the core rate.
For the first time this year, the Fed lowered interest rates this week as it has become increasingly concerned about a contracting labor market. Typically, while inflation is considerably above its 2% target, the Fed would not lower borrowing prices.
However, because prices haven’t increased as much as anticipated, the majority of senior Fed officials believe that inflation will shortly reach a peak of about 3%. By early next year, they anticipate inflation to begin to decline once more.
Nevertheless, Wall Street investors and Fed officials are keeping a closer eye on the monthly inflation figures than usual to see how things develop.
Resuming inflation and forcing the Fed to raise interest rates would be the worst-case scenario for the Fed and financial markets.
Important information: After falling in July, the price of goods, which are most impacted by tariffs, increased by a meager 0.1% last month. It’s encouraging for the Fed.
The cost of services increased by 0.3% for the second consecutive year, which wasn’t ideal. Earlier in the year, service costs had been declining in an effort to control inflation.
Service inflation may become a new cause for concern if it continues to be high. Tariffs often have little effect on service prices.
In summary, the most recent PCE price report does not represent a significant change.
The Fed’s decision to lower rates again in a month will be based on the September consumer pricing and employment data that will be released.
If there isn’t a rapid spike in inflation, another poor jobs report might help.
Considering the future: “Inflation isn’t accelerating again, but it’s also not reversing. “The economy is not overheating, but it is percolating,” stated Ellen Zentner, Morgan Stanley Wealth Management’s senior economic strategist.
“Barring a major upside surprise from next week’s jobs report, the Fed should remain on course to deliver another rate cut in late October,” she stated.
Reaction of the market: On Friday, the S&P 500 and Dow Jones Industrial Average both increased.
The 10-year Treasury note’s yield (BX:TMUBMUSD10Y) gradually increased to 4.19%.
