Fed’s Preferred Inflation Gauge Rose More Than Expected in August 2022

Consumer prices climbed more than expected in August, even as the Federal Reserve moves to raise interest rates to slow rising prices, according to the latest report on personal incomes and expenditures by the Bureau of Economic Analysis (BEA). The BEA’s Personal Consumption Expenditures (PCE) Price Index rose 0.3% in August, more than the 0.1% economists projected after a 0.1% decline in July.

The PCE Price Index is the Fed’s preferred gauge of inflation, and its rise would support the Fed’s increasingly hawkish stance on tightening monetary policy, and could mean another rate hike of 75 basis points or more at the Fed’s next policy meeting in November.

Key Takeaways

• The PCE Price Index rose 0.3% in August, up from a 0.1% decline in July as costs for food and other goods and services continued to climb.
• Personal incomes rose 0.3% and spending climbed 0.4% in August, in a sign of labor market resilience.
• Rising prices and a strong labor market would support the Fed’s position for raising interest rates to curb inflation.

The monthly rise in the PCE Price Index was driven by broad-based increases in costs of goods and services including food and housing, as energy prices declined. Food prices rose 0.8%, while housing and utility costs were up 1%. Health care costs rose 0.6%. Energy prices fell 5.5% from July.

Compared to the same period in 2021, the index was up 6.2%, down from a 6.4% gain in July as energy prices eased. Core PCE prices, which exclude more volatile food and energy costs, climbed 0.6% in August and were up 4.9% from a year ago, accelerating from July’s 4.7% year-over-year jump.

The PCE Price Index is the Federal Reserve’s preferred gauge of inflation, as it more accurately reflects consumers’ spending habits than the Consumer Price Index (CPI). The report showed personal incomes also edged up 0.3% last month in a sign of the job market’s resilience in the face of rising interest rates and recession worries. The increase was the same as in July, as workers continued to make steady gains. Spending rose 0.4%, as demand held up despite rising prices.

The central bank will no doubt weigh these results before its next policy meeting when policymakers will make another interest rate decision in November. Rising prices and continued strength from the nation’s labor market will likely encourage the Fed’s hawkish stance on tightening policy, which could mean another super-sized rate hike of 75 basis points.

While higher rates could help slow inflation, they also raise the costs of borrowing. Credit card data tracked by Investopedia sister site The Balance shows the average interest rate hit 21.64% last month—the highest average annual percentage rate since the site began recording them.