Inflation continues to slow, providing the Federal Reserve with some validation for its recent interest rate cuts. With the core inflation measure showing muted growth, the latest data indicates that the central bank’s approach may be working as intended. But is it enough to signal a long-term solution?

August Inflation Numbers: Encouraging but Mixed

The Federal Reserve’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index, rose by just 0.1% in August—lower than previous months and below economists’ predictions. This small increase in core PCE, which excludes food and energy, marks a deceleration from 0.2% increases in June and July, indicating that inflation may be stabilizing.

On an annual basis, core PCE inflation came in at 2.7% for August, slightly higher than July’s 2.6%, but right in line with expectations. While the monthly slowdown is good news, annual figures still suggest inflation remains a concern. However, with core inflation running below the Fed’s 2% target on a three-month annualized basis, this should give policymakers confidence in their recent rate-cut decisions.

Was the Fed's 50-Point Rate Cut Justified?

The August inflation data strengthens the case for the Federal Open Market Committee’s (FOMC) decision to cut benchmark interest rates by 50 basis points earlier this month. Clark Bellin, president and chief investment officer of Bellwether Wealth, confirmed that the deeper-than-expected rate cut was necessary to prevent economic damage from overly restrictive interest rates.

Looking ahead, the data from August allows the Fed to maintain focus on maximizing employment—another key element of its mandate—when deciding on additional rate cuts at upcoming policy meetings. The central bank is expected to implement two more quarter-point cuts by the end of the year, but some analysts are already speculating that another 50-basis-point cut could be in play for November.

Consumer Spending: Signs of Slowing Growth

In addition to inflation, consumer spending data for August suggests that Americans may be pulling back. Personal consumption expenditures (PCE) rose by just 0.2%, down from a 0.5% increase in July. The slowdown was largely driven by a decrease in spending on goods, while spending on services like housing and financial services remained steady.

When adjusted for inflation, consumer spending rose by only 0.1% in August, signaling that consumers may be becoming more cautious amid slowing income growth. Personal incomes rose by 0.2% in August, down slightly from the 0.3% growth seen in July, adding to the picture of a cooling economy.

What This Means for Future Rate Cuts

With inflation data trending downward and consumer spending slowing, many analysts expect the Federal Reserve to continue easing its monetary policy. Kathy Bostjancic, chief economist at Nationwide, sees the modest inflation increase as further reason for the Fed to maintain a dovish stance, possibly leading to additional rate cuts later this year.

However, Bostjancic warns that employment data will likely play a significant role in determining the pace of future cuts. The September jobs report, due in early October, is expected to heavily influence the Fed’s decision-making process in the months ahead.

Revisions to Savings and Income Data: What’s the Impact?

The Bureau of Economic Analysis (BEA) also released significant revisions to its data on personal income, disposable income, and savings rates, going back to January 2019. The personal savings rate for July, previously reported as 2.9%, was revised upward to 5.2%. Although this revision shows a less dramatic decline in consumer savings than initially thought, current savings levels remain well below the pre-pandemic rate of 7%.

Economists like Sonu Varghese of the Carson Group believe these revisions reveal that the U.S. economy has been stronger in the post-pandemic era than previously estimated. The upward adjustment in savings rates provides another layer of confidence for the Fed as it navigates its dual mandate of controlling inflation and supporting employment.

The Road Ahead for the Fed: Inflation vs. Employment

With inflation appearing to cool and savings revisions suggesting a stronger economic foundation, the Fed is likely to continue shifting its focus to employment. As Jamie Cox of Harris Financial Group noted, “Inflation is no longer the story in the PCE data for the Fed. It’s now all about spending and keeping the economy strong.” As the central bank evaluates incoming employment and spending data, we may see more rate cuts aimed at bolstering the labor market and stimulating economic growth.

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