Below Expected Core Inflation In August Holds Back Rapid Rise in Yields, Mortgage Rates

What happened: The Personal Consumption Expenditures (PCE) price index rose 0.4% in August after increasing 0.2% in July. The annual increase in the headline PCE price index was 3.5% up from 3.4% a month ago. Core PCE — the Federal Reserve’s preferred inflation gauge — also rose 0.1% month-over-month. However, the annual increase in core PCE was 3.9%, down from 4.3% a month ago. The three-month annualized core PCE rate is now running at 2.2% – closing in on the Fed’s 2% target.

What it means: Although headline inflation moved higher, the increase was mostly due to volatile energy prices, which rose by more than 10% in August from July. Today's numbers show core inflation eased up. Monthly growth in consumer spending (adjusted for inflation) saw a welcome slowdown to just 0.1% in August compared to 0.6% a month ago. The moderation in consumer spending will likely give the Fed additional grounds to put an end to the current tightening cycle.

Zillow Senior Economist Orphe Divounguy’s perspective: Today’s release was further evidence that the Federal Reserve could be done raising its key policy rate. The pace of consumer spending is moderating and the labor market is cooling. Rising energy prices, student loan repayment, tighter credit and a looming government shutdown are all headwinds that could cause the US economy to slow.

The yield on the 10-year Treasury fell on the news. Longer term interest rates depend on current inflation, inflation expectations and the economic outlook. Although estimates indicate a large increase in GDP in the third quarter and despite the latest uptick in the Fed’s summary of economic projections, further disinflation and lower than anticipated economic growth could hold back Treasury yields and the mortgage rates that tend to follow them.

Numbers to know: 

• The Personal Consumption Expenditures (PCE) price index rose 0.4% in August, after rising 0.2% in July. Annual growth in the PCE price index rose to 3.5% in August from 3.4% in July.
• Core PCE – which excludes food and energy – slowed to 0.1%, down from 0.2% in July. The annual increase in core PCE fell to 3.9% - down from 4.3% in July.
• Annual services inflation moderated to 4.9% in August, down from 5.2% in July. The housing component of the index is up 7.4% from a year ago easing from 7.7% in July.