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Fed’s Favorite Inflation Gauge Rises to 4.9%, Reinforcing the US Dollar Advance

fed’s-favorite-inflation-gauge-rises-to-4.9%,-reinforcing-the-us-dollar-advance

US PCE KEY POINTS:

  • August U.S. consumer spending rises 0.4% on a monthly basis versus 0.2% expected
  • Core PCE, the Fed’s favorite inflation gauge, increases 0.6% month-on-month, compared to a forecast of 0.5%. Meanwhile, the annual metric inches up to 4.9%, two tenths of a percent above projections
  • U.S. dollar extends gains as strong consumer spending and price pressures will prompt the Fed to stay on a hawkish path

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The U.S. Bureau of Economic Analysis released its latest report on personal consumption expenditures this morning. According to the agency, the August personal spending advanced 0.4% month-over-month versus the 0.2% expected – a sign that the consumer remains resilient despite sky-high inflation and slowing economic activity, aided in part by the solid labor market. Strong spending midway through the third quarter suggests that Americans are not yet cutting back on consumption despite the Fed’s aggressive tightening measures aimed at weakening demand.

Elsewhere, the PCE Price Index, which measures costs that people living in the U.S. pay for a variety of different items, increased 0.3% month-over-month and 6.2% year-over-year, two tenths of a percent above estimates in both cases. Meanwhile, the core PCE indicator, the Federal Reserve’s preferred inflation gauge that excludes food and energy and is used to make monetary policy decisions, jumped 0.6% on a seasonally adjusted basis, pushing the annual reading to 4.9% from 4.7% in July. Analysts polled by Bloomberg were anticipating a reading of 4.7% y-o-y.

DATA AT A GLANCE

Source: DailyFX Economic Calendar

PCE REPORT DETAILS

Strong consumer spending data, coupled with persistently elevated inflation, suggest that the U.S. central bank will have to slam on the breaks even harder to bring about more economic weakness in order to ease inflationary forces via demand destruction. In any case, today’s PCE results confirm that policymakers have more work ahead of them to tighten financial conditions in the coming months, a sign that the hiking cycle may extend beyond the start of 2023.

Immediately following the release of the personal consumption expenditures report, the U.S. dollar extended its gains, with the DXY index rising more than 0.7% on the day. Meanwhile, S&P 500 and Nasdaq 100 futures erased pre-market gains, falling moderately into negative territory. This reaction was driven by expectations that the Fed will have to press ahead with its plans to raise borrowing costs and maintain a restrictive stance for longer to achieve the price stability portion of its mandate in light of recent economic developments. Against this backdrop, the US dollar is likely to maintain an upward bias over the medium term. Risk assets, on the other hand, may continue to struggle.

US DOLLAR VERSUS S&P 500 AND NASDAQ 100 FUTURES

Source: TradingView

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—Written by Diego Colman, Market Strategist for DailyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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