Gas prices heated up inflation last month, but there’s also welcome progress for the Fed

By Alicia Wallace, CNN

Minneapolis (CNN) — Higher gas prices heated up overall inflation last month, but the Federal Reserve got some welcome news: Its preferred inflation gauge cooled to its lowest level in two years.

The core Personal Consumption Expenditures index, a closely watched inflation measure that excludes gas and food prices, rose 3.9% for the 12 months ended in August. It’s the lowest annual increase that index has seen in two years and is a positive step toward the Fed’s target of 2% inflation, according to Commerce Department data released Friday.

On a monthly basis, core PCE grew 0.1%, its slowest month-on-month increase since a 0.3% decline in April 2020.

“In terms of inflation, it’s an all-around positive report for those hoping for progress on the Fed’s fight to get back to 2%,” Andrew Patterson, a senior economist with Vanguard, told CNN.

Since March 2022, the US central bank has hiked the federal funds rate to its highest level in decades in an effort to bring down the highest inflation seen in 40-plus years.

The overall PCE index, which includes the more volatile food and energy categories, increased 0.4% from July and 3.5% annually. That’s an acceleration from the respective 0.2% and 3.4% rates seen in July. However, it also was largely expected: Gas prices heated up last month as well. Energy goods and services prices shot up by 6.1% in August from July, according to the report.

Economists estimated that the headline PCE index would rise 0.5% monthly and 3.5% annually, according to Refinitiv.

The rising cost of energy may continue to put upward pressure on inflation. Earlier this month, oil prices surged further after Saudi Arabia and Russia announced plans to extend production cuts.

“Energy prices eventually bleed through into all other costs,” Patterson said. “This certainly is a concern on the part of the Fed. We don’t want to see persistent $90 [a barrel] oil prices.”

Consumers still spending — but spending less

The Commerce Department’s latest Personal Income and Outlays report also showed that consumers pulled back their spending in August, rising 0.4% versus the upwardly revised 0.9% increase in July. Incomes ramped up by 0.4%.

The personal saving rate, which is savings as a percentage of disposable income, declined for the third consecutive month and fell to 3.9% from an upwardly revised 4.1% in July. As such, savings are now at their lowest level since December of last year.

Americans’ financial reserves are falling at a time when headwinds are picking up speed.

Credit card debt is mounting in a historically high interest rate environment, delinquencies are growing, the labor market is cooling and wage growth is moderating.

“All these things are coalescing into what we think will be a material slowing in consumer spending,” Dana Peterson, chief economist for the Conference Board, told CNN in an interview. Earlier this week, the Conference Board reported that consumer confidence fell to its lowest level in four months.

And, in a matter of days, student loan payments will be resuming after years of forbearance.

“That’s going to impact folks who tend to be 45 and under, and that’s your peak earning and peak spending years,” she said. “So all of a sudden, if you have these payments coming back, that takes away whatever discretionary income you might have. It also delays lifecycle-type milestones like being able to buy a home or buy a car or save for retirement.”

She added: “All of these things, slowly but surely, are eroding the strength that we saw in consumer spending over the past year.”

The last report before a data blackout?

The Commerce Department’s monthly Personal Income and Outlays reports are typically closely watched as they provide a comprehensive account of pricing, income and spending data.

However, Friday’s report could carry additional significance. If the US government does indeed shut down starting October 1, the Commerce Department’s report could be the last major piece of federal economic data released until an agreement is reached on funding.

Americans, economists, the markets and, especially, the Fed will be practically flying blind at a critical juncture for the economy.

If a shutdown occurs, the first federal reports to be waylaid will include key labor market data, specifically the Job Openings and Labor Turnover Survey report for August that’s due out Tuesday, and the September jobs report scheduled for Friday. Under the Department of Labor’s contingency plan, all 2,350 employees of the Bureau of Labor Statistics will be furloughed.

So, depending on the length of a shutdown, that could spill over and affect other BLS reports such as the Consumer Price Index, the Producer Price Index, Real Earnings, and US Import and Export Price Indexes, according to the plan. If CPI is delayed, that would affect the Social Security Administration’s planned 2024 Cost of Living Adjustment, Labor Department officials noted.

Other federal data at risk for delays could include key housing and auto sales data, Census Bureau data, PCE and GDP reports, among others.

“We’ve been saying for some time that we’re going to get a better understanding of the real trends in inflation and the labor market in the fall and winter of this year that could have very real implications for our views on policy and the Fed’s actual policy actions,” Vanguard’s Patterson said.

“Unfortunately, if we don’t have that data, or it’s delayed, that’s going to have implications for interpretation of the direction of the economy.”

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