US PCE inflation in August: disinflation continues

Over twelve months, the PCE price index increased 3.5%, up from 3.4% in June, largely because of the surge in gasoline prices. Core inflation, excluding food and energy, increased by 3.9%, down from 4.3%. Core inflation excluding housing rose 3.2%, down from 3.6%. Measured month-on-month, the seasonally adjusted PCE price index increased 0.4%, of which 0.24% was due to the component for gasoline and other energy goods. Excluding food and energy, the PCE price index increased 0.1 percent. Excluding food, energy and housing, it rose 0.1%.

Since the Federal Reserve attaches much more weight to core inflation than to headline inflation and finds measures of inflation that disregard the important but sticky housing component particularly informative, it will view these results as further evidence that inflation is continuing to abate.

Chart 1a. PCE inflation over 12 months

Source: EFG calculations on data from BEA. Data as of 29 September 2023.

Chart 1b. PCE inflation over 3 months

Source: EFG calculations on data from BEA. Data as of 29 September 2023.

Inflation measured year-over-year is best thought of as the average annualised monthly inflation rate over the last twelve months. That highlights that year-over-year inflation depends on price developments far back in time. A timelier measure of inflation is the annualised change in prices over three months, sometimes referred to as the “momentum” of inflation. Such measures have fallen to levels compatible with the Federal Reserve’s 2% objective.

Thus, while headline PCE inflation measured over three months rose from 2.0% in July to 3.1% in August, core PCE inflation fell from 2.7% to 2.1% and core inflation excluding housing fell from 2.1% to 1.5%. This suggests that inflation pressures are currently compatible with the Federal Reserve’s 2% objective.

Chart 2. Services inflation excluding energy and housing

Source: EFG calculations on data from BEA. Data as of 29 September 2023.

Since the Federal Reserve attaches significance to “super-core” inflation, defined as inflation as measured by services prices excluding energy and housing, it is of interest also to look at it.

The graph above shows that super-core inflation fell from 4.8% in July year-on-year to 4.4% in August; the annualised rate of increase over three months fell from 3.6% to 3.4%. While these inflation rates are much above the Federal Reserve’s 2% objective, progress has plainly been made.

Overall, inflation pressures are receding and so is the likelihood that the Federal Reserve will decide to raise interest rates in November and December.