Fed’s Inflation Rate Plunges; S&P 500 Futures Rise, Treasury Yields Fall

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Core price pressures cooled further in August, despite an increase in energy prices which lifted headline inflation. The personal consumption expenditures (PCE) price index rose 0.4% in August, with the annual inflation rate increasing to 3.5% from 3.3% in July. However, when looking at core inflation, which excludes volatile food and energy prices, core prices only rose 0.1% in August, and the core 12-month inflation rate eased to 3.9% from 4.2% in July, the lowest reading since September 2021.

Other data showed that personal spending moderated in August, with strong spending data from June and July being revised slightly lower. Personal income rose 0.4%, while personal consumption expenditures rose 0.4% in August, below expectations of a 0.5% increase. Adjusted for inflation, consumer spending only rose 0.1%. Federal Reserve chair Jerome Powell highlighted strong consumer spending as a reason for policymakers to anticipate only one quarter-point rate cut in the next 15 months.

The Federal Reserve’s decision-making puts more weight on core inflation, and with the recent decline in core price pressures, it may give policymakers more confidence in the current trend. Markets were initially pricing in low odds of a quarter-point rate hike by November and December. The S&P 500 futures pointed to a 0.7% advance after the PCE inflation report, showing positive market sentiment. If inflation continues to fall, it may be difficult for Treasury yields to remain high, potentially leading to a decrease in the 10-year yield.

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