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A key measure of U.S. inflation slipped unexpectedly in August, tempering expectations that the Federal Reserve may raise interest rates before year’s end.

The core personal consumption expenditure (PCE) index – the Fed’s preferred measure of inflation – rose 1.3% in the 12 months through August, the Commerce Department reported Friday. That’s down from 1.4% the previous month and expectations calling for the same.

Compared to July, the core PCE index edged up 0.1%, official data showed.

The Federal Reserve targets inflation at 2%, and is considered less likely to normalize monetary policy when cost pressures are below that level.

However, a broader inflation measure called the Consumer Price Index (CPI) accelerated in August, data from the Labor Department reported last month. Annual CPI rose to 1.9% in August, which was slightly higher than the median estimate calling for 1.8%. The gains were largely driven by a 6.3% surge in gasoline.

Oil prices have been on a tear as of late,

with Brent crude futures climbing to more than two-year highs. U.S. benchmark West Texas Intermediate (WTI) has also climbed to more than five-month highs.

Mixed inflation signals suggest economic growth moderated in the third quarter after a much stronger than expected April-June period. The effect of the recent hurricanes likely had an adverse impact on growth.

For its part, the Federal Reserve has been consistent in stating that interest rates may rise gradually in the coming months. Several Fed officials, including Chairwoman Janet Yellen, have given hawkish signals about the path of monetary policy.

The Federal Open Market Committee (FOMC) kept interest rates unchanged in September, but said balance sheet reduction will begin in October. Traders have assigned a 77.9% likelihood of a rate hike at the December FOMC meeting, according to the CME Group’s FedWatch Tool.

The U.S. dollar has certainly responded to growing rate-hike bets, with the dollar index (DXY) recently climbing to six-week highs. The DXY basket fell to multi-year lows this past summer on dismal economic data and a broad rebound in global currencies.

The currency markets will look to the economic calendar for direction in the first week of October. The Labor Department will issue nonfarm payrolls on Friday, which is arguably the most closely-watched data release of the month.


[1] Reuters (14 September 2017). “US consumer prices accelerate in August.” CNBC.

[2] Sue Goodridge (29 September 2017). “Oil Prices Hit 2-Year High: What It Means to Drilling Industry.” Market Realist.

[3] CME Group. FedWatch Tool.

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