Fed's Preferred Inflation Measure Comes in Much Lower Than Expected

The Fed’s preferred measure of inflation rose by much less than expected in August, data from the Commerce Department showed Wednesday.

The personal consumption expenditures price index climbed 3.4 percent over the past 12 months through August. Economists had forecast a 3.7 percent increase.

For the month, the PCE price index rose 0.3 percent, below the 0.4 percent increase forecast.

The prior month’s inflation data was revised down. July’s PCE index now shows a 0.1 percent monthly increase, down from 0.2 percent. The annual increase was revised down to 3.4 percent from 3.7 percent.

Excluding food and energy, so-called core PCE prices rose by 0.2 percent for the month and three percent year-over-year. The consensus forecast was for a 0.3 percent increase for the month and 3.3 percent for the year.

Goods prices rose 0.3 percent in August compared with July. Services also rose by 0.3 percent.

Energy prices were the main driver of inflation in August. Energy goods and services rose 2.3 percent, driven by a 4.4 percent increase in gasoline prices. Transportation services prices rose 1.4 percent.

The large revisions and the latest monthly figures reflect annual adjustments to the way the index is calculated. The Bureau of Economic Analysis changed the way it calculates prices for computer software and accessories, portfolio management and investment advice, and legal services. The inflation estimates for the second quarter, which runs from April through June, were also revised downward.

The Federal Reserve uses the PCE price index as the gauge for its two percent inflation target. It also closely watches the core index, which many economists see as a better gauge of underlying inflationary pressures.

The Commerce Department also reported on Wednesday that the economy grew at a faster pace in the second quarter than previously thought. Gross domestic product increased at an annualized rate of 2.2 percent, up sharply from the previous estimate of 1.5 percent. The upward revision reflects larger contributions from consumer spending, investment, and government expenditures.

Real final sales to private domestic purchasers, a proxy for the growth of the private sector and consumer demand, rose at an annualized rate of 4.6 percent, up from the earlier estimate of 4.2 percent.