Inflation measure favored by Fed cooled in August
Federal Reserve officials received more good news in their battle against rapid inflation Friday, when a key inflation measure continued to slow, the latest evidence that a return to normal after the pandemic and higher interest rates are combining to wrestle rapid price increases back to a more normal pace.
The personal consumption expenditures index, which the central bank uses to define its 2 percent inflation goal, rose slightly more quickly last month as higher gas prices gave it a boost. It rose 3.5 percent in August from a year earlier, up from 3.4 percent in July.
But after stripping out food and fuel costs, both of which are volatile, a “core” inflation measure that Fed officials watch closely is beginning to cool notably. That measure picked up 3.9 percent from a year earlier, which was down from 4.3 percent in July. Compared with the previous month, it climbed 0.1 percent, a very muted pace.
It’s the latest encouraging sign for Fed policymakers, who have been raising interest rates since March 2022 in a campaign to slow the economy and cool price increases. While economic momentum has held up better than expected, a less ebullient housing market and a grinding return to normalcy in the car market have helped key prices — such as for automobiles and rents — to fade. At the same time, supply chain disruptions that led to shortages and starkly pushed up prices starting in 2021 have gradually cleared up, allowing costs for many goods to stop rising or even drop slightly.
Given the progress, central bankers are now contemplating whether they need to raise interest rates further. They left them unchanged and in range of 5.25 percent to 5.5 percent at their meeting this month. At the same time, given how strong the economy remains, officials have signaled that they may need to leave interest rates set to a high level for longer to ensure that inflation returns to normal in a sustainable way.