Fed's Favored Inflation Gauge, Consumer Spending Barely Rise

The Federal Reserve’s preferred measure of underlying US inflation and household spending rose modestly in August, underscoring a cooling economy.

(Bloomberg) — The Federal Reserve’s preferred measure of underlying US inflation and household spending rose modestly in August, underscoring a cooling economy.

The so-called core personal consumption expenditures price index, which excludes volatile food and energy items, increased 0.1% from July, according to Bureau of Economic Analysis data out Friday. That was the smallest gain in three months. On a three-month annualized basis, the measure rose 2.1%, in line with the central bank’s target.

Spending also rose 0.1% after adjusting for inflation. Nominal personal income increased 0.2% and the saving rate eased to 4.8%.

Treasury yields and the dollar fell on expectations the figures will keep the Fed on track for more rate cuts in the coming months while fueling ongoing debate over how big the reductions should be. The central bank opted for an outsize half-point cut this month to kick off its easing cycle, and investors are split over whether it will take a similar step or opt for a smaller move in November, according to futures.

The report follows annual revisions to gross domestic product data published Thursday by the BEA, which showed faster economic growth and more saving — fueled by higher incomes — than previously reported in 2022 and 2023.

Details of the August inflation numbers showed a broad cooling. Services prices excluding housing and energy rose 0.2% for a second month. Goods prices minus food and energy declined 0.2%, the most in three months.

The rise in spending was driven by a pickup in outlays on services. Overall services spending rose 0.2% after a 0.1% gain, while goods spending was unchanged after a solid advance the previous month.

While wages and salaries rose by the most since May, growth in disposable income slowed, restrained by declines in proprietors’ income, interest income and dividend income.

—With assistance from Dominic Carey and Liz Capo McCormick.

(Adds wages and salaries)