Fed’s preferred inflation measure falls more than expected to 2.2%

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The Federal Reserve’s preferred measure of U.S. inflation fell more than expected to 2.2 percent in the year to August, paving the way for the central bank to cut interest rates again in November.

The data on the price index of private consumer spending compared to economists’ expectations of an annual increase of 2.3 percent and the July figure of 2.5 percent.

The Fed’s goal is headline PCE inflation of 2 percent per year.

The central bank cut interest rates by half a percentage point last week – the first cut since the pandemic – and signaled more cuts would follow.

Chairman Jay Powell said the Fed will do “everything we can to support a strong labor market” while ensuring prices remain under control after the biggest rise in inflation in a generation.

The economy is one of the biggest issues in November’s presidential election, and last week’s rate cut sparked criticism from Republican candidate Donald Trump.

Fed fund futures for the central bank’s next meeting in November – which will take place immediately after the election – suggest investors are currently evenly split between expecting a quarter-point and half-point cut.

“If the Fed wants to cut interest rates by another 50 basis points in November, the inflation data will not stand in its way,” Omair Sharif, an economist at Inflation Insights, said in a note on Friday.

But Torsten Slok, chief economist at Apollo, said the August core PCE number, which excludes volatile food and fuel prices, “points to a smaller quarter-point cut in November.”

The core measure rose 2.7 percent, in line with economists’ expectations and compared with a 2.6 percent rise in July.

“Overall, inflation trends are certainly looking better,” Slok added. “It’s going in the right direction for the Fed.”

The yields on interest-sensitive two-year government bonds, which move in the opposite direction to prices, fell by 0.03 percentage points to 3.59 percent after the figures were published.

Contracts tracking Wall Street’s blue-chip S&P 500 index and contracts tracking the tech-heavy Nasdaq 100 both rose 0.1 percent ahead of the New York open. The dollar index slipped 0.3 percent.

The inflation data will allow Kamala Harris, the US vice president and Democratic contender for the White House, to claim that inflation has returned to roughly the levels it was at the start of the Biden administration.

Throughout the campaign, Trump has criticized Harris for causing the hyperinflation that peaked in 2022 and left many American households struggling with the cost of living.

Earlier this year, the Fed held off on easing monetary policy because of concerns that inflation wasn’t falling fast enough and the labor market was too strong.

But a slowdown in job creation and lower inflation helped build a consensus at the central bank in favor of cutting interest rates.

Olu Sonola, head of U.S. economic research at Fitch Ratings, said the August inflation numbers “are unlikely to move the Fed in the direction of further strong inflation.” [half-point] Cut in November.

Additional reporting by George Steer and Jennifer Hughes