A key measure of US inflation was stable in August, paving the way for further interest rate cuts in the world’s largest economy and prompting a relief rally on Wall Street.
The US central bank’s preferred measure of price pressures, known as the core personal consumption expenditure index, rose by 0.2 per cent between July and August, in line with expectations and unchanged from the previous month. The annual rate was 2.7 per cent, up from a 2.6 per cent year-over-year increase in July.
On an annual basis, the core index, which strips out volatile elements like food and energy, stabilised at 2.9 per cent, according to the US Bureau of Economic Analysis. It slowed to 2.5 per cent when measured on a six-month annualised basis.
The inflation index measures the changes in prices for goods and services that Americans spend on. The Fed targets a core rate of 2 per cent and has said it is worried that US tariffs — the highest in a century — will raise the cost of imported goods and drive up inflation this year.
“Significantly more inflation pass-through is still to come. Firms aggressively accumulated inventories during the first half of the year, and this has given them scope to delay price increases. But that process is now playing through,” Citigroup’s global chief economist Nathan Sheets said.
The dollar slipped by 0.2 per cent against a basket of currencies and yields on two-year US government bonds, which are sensitive to changes in interest rate expectations, were unchanged on Friday afternoon.
The Dow Jones rose 154.1 points, or 0.34 per cent, at the open to 46,101.45. The S&P 500 rose 10.7 points, or 0.16 per cent, to 6,615.38, while the Nasdaq Composite rose 18.6 points, or 0.08 per cent, to 22,403.273.
Financial markets expect the Fed to cut interest rates twice again this year after it carried out its first monetary loosening of the year this month. The Fed, which has been under attack from President Trump for not reducing borrowing costs, has said it is concerned about a slowdown in the jobs market more than the imminent threat of surging inflation caused by tariffs.
The US economy remains the fastest-growing in the world this year despite uncertainty caused by trade policy. Growth rose by 3.8 per cent on an annualised measure in the second quarter of the year – the best performance in 18 months and above an initial estimate of 3.3 per cent.
Separate figures released on Friday showed that American consumers are still driving the economy, with a monthly measure of personal spending up by 0.6 per cent in August. Economists had expected a weakening to 0.3 per cent.