US inflation eases, but markets remain uncertain
Price rises were lower than expected in August, while strong growth figures continue to fuel interest-rate concerns in financial markets.
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US inflation eased slightly in August but remains clearly above the Federal Reserve’s target. Investors initially reacted positively to the figures, after which stronger-than-expected growth figures again put interest-rate and market expectations under pressure.
The personal consumption expenditures price index, the inflation measure closely tracked by the Federal Reserve, was 3.4 per cent higher in August than a year earlier. In July, the increase was 3.7 per cent. On a monthly basis, prices rose by 0.3 per cent, compared with 0.1 per cent in July.
Core inflation, which excludes food and energy prices, also remained high but came in lower than many economists had expected. The core index rose by 3 per cent year on year and by 0.2 per cent month on month. This does not yet amount to price stability, but it does indicate a less pronounced underlying increase than feared.
Meanwhile, American consumers continued to spend. According to reports on the figures, consumption increased in August, suggesting that there is still sufficient demand in the economy to keep price pressures in place. For the central bank, this makes the trade-off complicated: interest rates that are too low do not curb inflation sufficiently, while rates that are too high can harm growth and the labour market.
The market reaction therefore unfolded in two phases. Shares initially rose after the inflation report, as investors saw less reason for a rapid rate increase. Sentiment later turned when new figures showed that the US economy had grown more strongly than previously estimated in the second quarter.
Growth in the second quarter came in at an annualised rate of 2.2 per cent, up from 1.5 per cent in the previous estimate. Consumer spending increased at an annualised rate of 3.8 per cent in the same quarter. That picture of a resilient economy could keep interest rates high for longer, even if inflation declines at certain points.
On 16 September, the Federal Reserve raised its policy rate by a quarter of a percentage point to a range of 3.75 to 4 per cent. The central bank said at the time that inflation remained elevated and that policy was still needed to support a return to its 2 per cent target.
For households and businesses, the new information mainly means that the interest-rate outlook remains uncertain. Lower inflation could create scope for future rate cuts, but strong growth and continued consumption could make the central bank more cautious. The figures also say nothing directly about price developments in the Netherlands; European and Dutch statistics are decisive for that.
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The main percentages, growth figures and interest-rate decision can be checked through AP, the Federal Reserve and the Bureau of Economic Analysis. The text clearly distinguishes between measured figures and the uncertain consequences for future policy.
- confirmed US PCE inflation rose by 3.4 per cent year on year and 0.3 per cent month on month in August. — Reported by AP based on the US inflation report. source
- confirmed Core PCE rose by 3 per cent year on year and 0.2 per cent month on month. — The figures appear in AP’s summary of the PCE report. source
- confirmed The US economy grew at an annualised rate of 2.2 per cent in the second quarter. — AP reported the upward revision by the US Department of Commerce. source
- confirmed Consumer spending grew at an annualised rate of 3.8 per cent in the second quarter. — Mentioned in the same AP report on the revised growth figure. source
- confirmed The Federal Reserve raised its policy rate to 3.75 to 4 per cent on 16 September. — Stated in the official FOMC decision. source
- confirmed The Federal Reserve has an inflation target of 2 per cent. — In its statement, the central bank refers to a return to its 2 per cent target. source
Editor's note
The inflation, growth and interest-rate figures are linked to public US statistical and central-bank sources and summarised by AP. The consequences for future interest-rate policy are interpretative and remain uncertain; the figures do not directly say anything about inflation in the Netherlands.Sources
- Inflation cooled slightly last month even as consumers stepped up spending — Associated Press
- US economy grew a solid 2.2% in the second quarter — Associated Press
- Federal Reserve issues FOMC statement — Federal Reserve
- Personal Consumption Expenditures Price Index — U.S. Bureau of Economic Analysis