Another Key Inflation Report Is Due Friday. Here’s What to Expect.

A closely watched report Friday is expected to show that price increases are nearly back to normal.

Forecasters expect the Bureau of Labor Statistics to report that the cost of living rose 2.3% year over year in August as measured by Personal Consumption Expenditures, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. That would be down from 2.5% annual inflation in July, which was the lowest level since February 2021.

Should the report meet expectations, it would highlight how much price increases have decelerated from the highest levels in more than 40 years in June 2022. The decreasing inflation rate means that prices aren’t going up as quickly, but prices for most things aren’t going back down after surging in the wake of the pandemic.

Cooling Inflation Paved The Way For Rate Cuts

Friday’s report follows a turning point in the battle against inflation: The Federal Reserve’s decision last week to reduce its benchmark interest rate by 0.5 percentage points. Up to that point, the central bank’s policy was to keep borrowing costs high to push inflation down. Now, Fed officials are confident inflation is firmly on a path down to their goal of stabilizing around a 2% annual rate.

The Fed’s campaign of rate hikes began in March 2022, pushing up borrowing costs on mortgages, credit cards, car loans, and other debt. The goal was to slow borrowing and spending and allow supply and demand to rebalance. In the view of Fed officials, inflation had spiked because COVID-19 restricted supplies of crucial goods and services at the same time that consumers had lots of money to spend due to a good job market and government relief programs.

Friday’s PCE report could contain some mixed signals. Forecasters expect core inflation—a measure that excludes energy and food—to rise to 2.7% annually from 2.6% in July, mainly due to rent inflation. Government measures of rent inflation have stayed stubbornly high even as other important prices have risen little.

Higher-than-expected inflation in the coming months could delay the Fed’s plans to cut interest rates further, while lower readings could accelerate them. However, Fed officials have increasingly focused not on inflation, but on the labor market. Data on jobs is likely to play a larger role in the thinking of policymakers. The Fed is tasked with stabilizing prices as well as keeping unemployment low, and rising unemployment this year was a major reason the Fed decided to start lowering rates. 

Consumer Spending Likely Increased

Friday’s report also details how much money Americans made and spent, and is expected to show both of those measures growing steadily. Forecasters expect to see spending having risen 0.3% in August, down from 0.5% growth in July, and income rising 0.4%, up from 0.3% the month before. 

Steadily accelerating consumer spending has buoyed the U.S. economy through the period of high interest rates, keeping businesses afloat and preventing a recession and mass layoffs.