The Personal Consumption Expenditures index, the Federal Reserve’s preferred inflation measure, rose in August. The index climbed 0.3% from July. Year over year the PCE is up 6.2%. Excluding food and energy, the core PC index rose 0.6% in August from July and at a 4.9% year-over-year rate.
Both the headline and core numbers showed a month-to-month acceleration in inflation. That’s bad news for the Federal Reserve, investors, and consumers since it indicates that inflation is stickier than hoped and that it will take the Fed longer to bring inflation down to its 2% target.
The only good news in the report? Purchases of goods and services, adjusted for inflation, increased 0.1% in August from July after a month-over-month drop of 0.1% in July.
This ratchets up the importance of the Consumer Price Index for September with that inflation number due on Thursday, October 13. The headline CPI has shown a slight retreat in inflation in the last two months. A lower reading would cement that trend. An uptick in inflation would create worries that the Fed’s tightening of interest rates isn’t having much impact on inflation and the U.S. central bank will need to raise rates higher and for longer than Wall Street hopes.
The tea leaves for the October 13 report on September CPI inflation are decidedly mixed. The Cleveland Fed’s Nowcast of inflation, which tracks swings in energy and other prices, has inflation for September coming in with an increase of 0.3% month-on-month. That would be an increase from the 0.1% month-to-month increase in August. But it would be enough to push the year-over-year inflation rate toward 8% from the 8.3% rate in August.
But an improvement in the headline number probably won’t be enough to convince investors that inflation is coming down. Much of the drop in headline inflation has come from a retreat in energy prices. If energy prices look to be stabilizing that would leave economists, investors, and the Fed worried that the inflation rate isn’t likely to retreat in coming months.
Asa much as the recent drop in stock prices is based on a fear of higher interest rates, the financial markets still believe that the Federal Reserve’s interest rate increases will be able to bring inflation under control in early 2023. A CPI number that bolstered that hope might be enough to move stocks to recover part of their recent losses. A CPI, however, that raised fears that the Fed will have to raise rates even higher and longer into 2023 would likely keep the downtrend in place.
It’s “interesting” that the CPI report comes out just before the start of third-quarter earnings season. Netflix (NFLX), an early reporter, releases results for the quarter on October 18. Apple (AAPL) and Amazon (AMZN) report on October 27.
