US inflation for August came in below analyst expectations, giving the Fed more room to wait and see economic data before deciding on a rate hike at its October meeting. The US Commerce Department reported that the Personal Consumption Expenditures price index, or PCE, rose 0.3% month-on-month, below the 0.4% increase economists in a Reuters poll had expected. Year-on-year, PCE rose 3.4%, matching July's figure, which was revised down from the previously reported 3.7%. Meanwhile, the core PCE index rose 0.2% month-on-month and 3.0% year-on-year, matching July, which was revised down from the previously reported 3.3%. The downward revisions to inflation figures were partly the result of the US Bureau of Economic Analysis, or BEA, changing its method for calculating prices of certain goods and services, along with revisions to historical data going back to 2021, which lowered the core PCE inflation rate by about 0.36 percentage points, more than the roughly 0.20 to 0.30 percentage points economists had expected. The lower-than-expected inflation data led financial markets to reduce the odds they assign to a Fed rate hike at its October 27-28 meeting, with the CME FedWatch Tool showing the market pricing in about a 41.5% chance of a hike, down from 51.5% before the data release and 70% last Monday. Earlier, the Fed raised its policy rate to a range of 3.75% to 4.00% in September, its first rate hike in three years. However, the US economy remains strong, with consumer spending jumping 0.9% in August after rising just 0.1% in July, and up 0.6% after adjusting for inflation. Second-quarter GDP grew at an annual rate of 2.2%, revised upward from the previous estimate.
Below-expectation PCE inflation cuts the odds of an October Fed rate hike, implying the policy rate stays lower than previously expected.
Softer inflation and reduced October hike odds lower expected policy rates, pulling the 10-year Treasury yield down.
