The Fed’s favored measure of inflation fell as the price and growth battle got back on track

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The Federal Reserve’s battle against inflation is back on track after a summer surge, with the central bank’s preferred measure of price growth falling to its lowest level since September 2021 in an encouraging sign.

For investors, this means the Fed may be less likely to raise interest rates — which have already reached a generational peak — again in November or December, boosting the stock market, which has recently been rocked by concerns about the future of interest rates.

The core PCE price index, also known as the core PCE deflator, rose 3.9% year over year in August, down from a revised 4.3% in July and meeting expectations of economists surveyed by FactSet.

The core personal consumption expenditures deflator rose 0.1% m/m, down from 0.2% in July and below expectations of 0.2%.

This is the first time in nearly two years that the core PCE rate has stood below 4%, a milestone for markets that have faced the most aggressive round of interest rate hikes by the Fed since the 1980s, a major headwind for stocks and a driver of the crisis. Last. Year sales.

“The Fed’s aggressive campaign is working,” said Carol Schleif, chief investment officer at BMO Family Office. “The challenge is that core personal consumption expenditures remain roughly double the Fed’s 2% target, prompting the Fed to maintain the possibility of another rate hike.”

In fact, there is still more work to be done, but investors know it. The Fed signaled after its latest monetary policy decision last week that borrowing costs may need to rise further to sufficiently restrain inflation, a message that added to new pressures on stocks and sent the benchmark 10-year Treasury yield to its highest level since 2007.

However, the latest glimpse of inflation has traders boosting their bets that the Fed will be more dovish. The CME FedWatch tool, which tracks interest rate futures, showed the odds of a rate hike at the Fed’s November policy meeting at 15%, down from 19% on Thursday and 28% a week ago. Some market participants are even becoming more optimistic about the possibility of interest rate cuts next year.

“Barring a dramatic reacceleration in that monthly pace, which is unlikely given the cooling labor market and the sharp decline in housing inflation, we continue to expect core PCE inflation to fall well below the Fed’s 3.7% forecast.” “That should help ensure that the Fed’s next step will be to start cutting rates again early next year,” said Andrew Hunter, an economist at Capital Economics.

But challenges remain. The PCE headline, which includes volatile food and energy prices that the core measure excludes, tells a less optimistic story, as higher oil prices push up the cost of living. The headline personal consumption expenditures index jumped 3.5% from a year ago, which was in line with expectations but the highest level since May.

Energy prices rose 6.1% compared to July, making them the largest contributor ever to the rise in personal consumption expenditures. Oil has rebounded from its summer lows, pushing the price of West Texas Intermediate crude, the U.S. oil market benchmark, to its highest level in more than a year this week — a sign that these pressures will continue.

“If oil prices continue to remain at higher levels…they will soon work their way into the cracks of the broader economy sending a variety of prices higher,” said Quincy Crosby, chief global strategist at LPL Financial. “The Fed should be pleased with the overall direction of the PCE report, but declaring victory in curbing inflation would be premature.”

Investors may not be declaring victory, but the celebration was what characterized Friday’s trading. The yield on two-year Treasury bonds, an indicator of market expectations for interest rates in the next two years, fell to 5.02% from 5.08% earlier. the

Dow Jones Industrial Average
It rose in the latest trading by 110 points, or 0.3%.

Standard & Poor’s 500
Advance 0.7%.

September is historically the worst month of the year for stocks, and this was no exception. However, the latest release of inflation is, at least, helping investors end the month on the right note.

Write to Jack Denton at [email protected]