In August, the cost of goods and services experienced a significant increase of 0.4%, marking the largest upturn in seven months. This rise can mostly be attributed to higher gas prices. However, it’s important to note that inflation is showing signs of slowing down.
According to the government’s report on Friday, the year-on-year increase in the PCE price index, which is the Federal Reserve’s preferred measure of inflation, reached 3.5% compared to the previous 3.4%.
On the other hand, the core PCE rate of inflation, which excludes volatile food and energy costs and is considered a more reliable predictor of future inflation trends by the Fed, only rose by a modest 0.1% last month. This figure fell short of the 0.2% increase that economists predicted in a survey conducted by The Wall Street Journal.
Looking at the past year, the rate of core inflation has decelerated to 3.9% from 4.3%, reaching its lowest point in almost two years.
Big Picture
Although the rate of inflation is gradually slowing down, the recent surge in oil prices has momentarily disrupted this downward trend.
The Federal Reserve is prepared to halt the increase of interest rates if it sees further indications that inflation is declining. However, it is likely that rates will remain high well into next year to ensure that price pressures return to pre-pandemic levels of 2% or less.
Market Reaction
As of Friday trades, the Dow Jones Industrial Average (DJIA) and the S&P 500 (SPX) are expected to open higher. Meanwhile, the yield on the 10-year Treasury note (TMUBMUSD10Y) slipped slightly to 4.55%.