Inflation Continues To Cool, Paving Way For More Interest Rate Cuts

The personal consumption expenditures price index, the Federal Reserve's favored inflation measure, rose just 0.1% from July to August, according to data released by the Commerce Department on Friday, a sign that could pave the way to further interest rate cuts.

Over the past year, the government's figures show that core inflation rose to 2.2% in August after hitting 2.5% in July, just a smidgen over the Fed's 2% target rate.

In August, food prices inched up by 0.1% but energy costs declined by 0.8% as gas prices continue to shrink.

The Federal Reserve cut interest rates by half a percentage point last week, the first in four years, that will bring down the costs of borrowing for mortgages and credit cards, and introduce some promising economic news months before the presidential election in which the economy has emerged as one of the top issues.

The Fed also signaled that another half-point cut could come before the end of the year and more cuts in 2025.

"It is time to recalibrate our policy to something that is more appropriate, given the progress on inflation, and on employment moving to a more sustainable level," Fed Chair Jerome Powell said after the rate cut was announced.

"This is the beginning of that process," he added.

Experts saw the PCE data as a promising sign in the fight to lower inflation.

"Inflation is no longer the story in the PCE data for the Fed. It's now all about spending and keeping the economy strong. If you were second guessing the Fed going .50 in September, you aren't now. These data suggest another .50 in November is likely," Jamie Cox, managing partner of Harris Financial Group in Richmond, Va., said in an emailed statement to Reuters.

Peter Cardillo, chief market economist at Spartan Capital Securities in New York, said the data indicated the economy is slowing down.

"Basically, these numbers confirm two things. One, inflation continues to move lower and if you look at year-to-year headline at 2.2%, we're not far from the Fed's 2% target. Personal income and spending were cooler than expected and that's another indication that the economy is slowing," he said in an email statement to Reuters.

"That's good news for the markets in a way, and it basically indicates that the Fed is likely to continue to cut, perhaps by another 50 basis points by year-end," he continued.