Brighter US inflation outlook as underlying price pressures diminish.

Consumer spending in the U.S. increased by 0.4% in August, according to a report from the Commerce Department. This data suggests that while the economy is still strong, consumer spending is slowing down. Inflation also moderated in August, with the annual rise in prices excluding food and energy falling below 4.0% for the first time in more than two years. This is good news for the Federal Reserve as it considers its monetary policy outlook. The central bank may be less likely to hike interest rates in November due to cooling underlying price pressures and slowing consumer spending.

While overall prices in the U.S. are still elevated, the report shows progress in the fight against inflation. The personal consumption expenditures (PCE) price index, excluding food and energy, edged up by 0.1% in August, the smallest rise since November 2020. The annual core PCE price index also dropped below 4.0% for the first time since June 2021. These figures suggest that inflation may be under control, which could shift the focus for Fed officials to how long interest rates should stay at their current levels rather than how much higher they need to go.

However, there are still factors that could pose challenges to controlling inflation. Rising oil prices, particularly the cost of gasoline, could hinder the Fed’s efforts to reach its 2% inflation target. Additionally, the impending partial shutdown of the U.S. government, set to begin after midnight on Saturday, could cause disruptions and impact consumer spending. Despite these challenges, overall growth prospects for the third quarter remain positive, with estimates of gross domestic product growth as high as a 4.9% annualized rate.

In conclusion, the latest report on consumer spending and inflation in the U.S. indicates that while consumer spending is slowing down, inflation is moderating. These factors may influence the Federal Reserve’s decision on whether or not to hike interest rates in November. The report also suggests that progress is being made in controlling inflation, although challenges such as rising gasoline prices and an impending government shutdown could impact the economy. Overall, the growth prospects for the third quarter remain positive, indicating a strong economy despite some signs of stress in consumer spending.

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