The core personal-consumption-expenditures price index, which excludes food and energy products, was flat in August from July, the Commerce Department said Friday. The broader PCE index, including those volatile components, rose 0.1%, due to a surge in gas prices. On a 12-month basis, both price measures were at or near the Federal Reserve’s 2% inflation target. The core index rose 2% from August 2017, while the broader PCE index was up 2.2%.
Friday’s data are likely to validate the Fed’s view that inflation pressures are under control, even as the economy grows briskly and the unemployment rate hovers well below levels that most economists view as sustainable. Policy makers view the core PCE index as a reliable indicator of underlying price pressures and a good predictor of future inflation. “I don’t see it yet,” Fed Chairman Jerome Powell said Wednesday of a pickup in inflation.
“We’re seeing a sort of modest increase in wages, inflation right around 2%, no sense of it moving up really, so we’re not seeing it yet and, you know, we just aren’t. And we’re watching very carefully.” The Fed seeks 2% inflation because they see that as consistent with a healthy economy.
The last time core PCE inflation was lower on a monthly basis was in March 2017, when intense competition among cellphone service providers caused prices for wireless plans to plummet. By contrast, the slowdown last month was more broad-based, with prices for a variety of items—including household appliances, clothing and medical products—declining, while health care costs were flat.
Many economists say a stronger dollar is likely keeping a lid on the prices of goods, many of which are either purchased overseas or compete with imports. The WSJ Dollar Index, which measures the greenback against a basket of other currencies, has risen about 7% since mid-April. Investors say the appreciation has likely been fueled by rising interest rates and faster economic growth in the U.S. compared with other developed economies.
The Fed, seeking to keep the economy on an even keel, has raised its benchmark interest rate three times this year to a range between 2% and 2.25%. Most central-bank officials expect to raise rates again before year’s end and three more times next year and one in 2020. While many economists expect the Trump administration’s trade disputes to put upward pressure on prices in the months ahead, that hasn’t happened yet. Monthly core PCE readings moderated over the summer, averaging just 1.3% on an annualized basis from June through August, said Julia Coronado, president of Macropolicy Perspectives.
That suggests it may be too early for the Fed to declare success in its goal of bringing inflation sustainably back to 2% after years of falling short after the recession, Ms. Coronado said. “It looks like we’ve moved up to a slightly higher range, but it’s not clear that we can yet say that the Fed is symmetrically achieving its inflation target,” she said. “While wage growth has been moving higher, it’s still very moderate, and consumers are still very price sensitive.”