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Fed’s preferred inflation measure falls more than expected to 2.2%

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The Federal Reserve’s preferred measure of US inflation dropped by more than expected to 2.2 per cent in the year to August, paving the way for the central bank to cut interest rates again in November.

The data on the personal consumption expenditures price index compared with economists’ expectations of a 2.3 per cent annual gain and July’s figure of 2.5 per cent.

The Fed’s target is for headline PCE inflation of 2 per cent a year.

The central bank lowered interest rates by half a percentage point last week — its first cut since the pandemic — and signalled that more reductions would follow.

Chair Jay Powell has said the Fed “will do everything we can to support a strong labour market” while ensuring that prices remain under control after the biggest surge of inflation in a generation.

The state of the economy is one of the biggest issues in November’s presidential election and last week’s rate cut drew criticism from Republican nominee Donald Trump.

Fed funds futures covering the central bank’s next meeting in November — which will come straight after the election — suggest investors are currently split evenly between expecting a quarter-point and a half point cut.

“If the Fed wants to cut by another 50 basis points in November, the inflation data isn’t going to stand in their way,” Omair Sharif, an economist at Inflation Insights, said in a note on Friday.

But Torsten Slok, chief economist at Apollo, said August’s figure for core PCE, which strips out volatile food and fuel prices, “argues for a smaller quarter-point cut in November.”

The core measure rose by 2.7 per cent, matching economists’ expectations and comparing with a 2.6 per cent increase in July.

“Overall the trend in inflation is certainly looking better,” Slok added. “Things are moving in the right direction for the Fed.”

Yields on interest rate-sensitive two-year Treasuries, which move inversely to prices, slipped 0.03 percentage points to 3.59 per cent after the figures were published.

Contracts tracking Wall Street’s blue-chip S&P 500 and those tracking the tech-heavy Nasdaq 100 both rose 0.1 per cent ahead of the New York open. The dollar index slipped 0.3 per cent.

The inflation data will allow Kamala Harris, the US vice-president and Democratic contender for the White House, to claim that inflation has been brought back down to about the rate it was at the start of the Biden administration.

Throughout the campaign Trump has blasted Harris for presiding over the bout of high inflation that peaked in 2022, which has left many American households struggling with the cost of living.

The Fed held off loosening of monetary policy earlier this year amid concern that inflation was not falling quickly enough and the labour market was too strong.

But a slowdown in jobs creation and lower inflation helped forge a consensus at the central bank in favour of cutting rates.

Olu Sonola, head of US economic research at Fitch Ratings, said August’s inflation figures were unlikely to “nudge the Fed in the direction of another forceful [half-point] cut in November.

Additional reporting by George Steer and Jennifer Hughes

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