The Federal Reserve is facing mixed signals on U.S. inflation as it weighs whether to raise short-term interest rates one more time in 2017.
The Fed's preferred price gauge, the personal-consumption expenditures price index, rose 0.2% in August from a year earlier, the Commerce Department said Friday. Excluding volatile food and energy prices, the index rose a modest 0.1% on the month, less than economists had expected.
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Compared with a year earlier, headline prices rose 1.4% and so-called core prices were up just 1.3% -- well below the Fed's long-elusive 2% annual target and showing little evidence of an incipient pickup.
The Fed needs to see "some firming" in the coming months to stay on track for a rate increase in December, "but it doesn't need to be substantial" to clear the bar for action, said Gregory Daco, chief U.S. economist at Oxford Economics.
Another broad gauge of U.S. inflation, the Labor Department's consumer-price index, showed stronger growth for headline and core prices in August. That was in part due to a jump in shelter costs; the Fed-favored PCE index gives significantly less weight to housing than does the CPI.
"That's just in the composition of the two different baskets," Mr. Daco said.
Price growth has been subdued in recent months even with the unemployment rate hovering below 4.5%, surprising central-bank officials who expect price and wage pressures to build in response to a tightening labor market. Some have blamed one-off factors, such as a sharp decline this spring in prices for cellphone plans, while other policy makers have worried that the slump may reflect more fundamental forces.
"My colleagues and I currently think that this year's low inflation is probably temporary, so we continue to anticipate that inflation is likely to stabilize around 2% over the next few years," Fed Chairwoman Janet Yellen said Tuesday during a speech in Cleveland.
"But," she added, "our understanding of the forces driving inflation is imperfect, and we recognize that something more persistent may be responsible for the current undershooting of our longer-run objective."
Fed officials raised short-term interest rates twice this year, in March and June, and in September announced they would begin to shrink the central bank's $4.5 trillion portfolio of bonds and other assets.
Policy makers penciled in one more quarter-percentage-point rate increase by the end of 2017, which analysts have predicted will come at the Fed's Dec. 12-13 policy meeting.
Much depends on the behavior of inflation. A broad pickup in price pressures would support the case for a rate increase, while a continued slump could make a rate move less likely.
Ms. Yellen this week said Fed officials "will monitor incoming data closely and stand ready to modify our views based on what we learn." The Commerce Department will release two more monthly readings on PCE inflation between now and the Fed's December meeting.
Friday's report also showed that consumer spending was soft in August. Personal-consumption expenditures, a broad measure of household outlays on everything from groceries to doctor visits, rose a seasonally adjusted 0.1% in August from a month earlier.
Personal income from sources like paychecks, investments and government benefits was up 0.2% in August.
Adjusted for inflation, consumer spending fell 0.1% in August from the prior month. That was the first decline in price-adjusted outlays since January, driven in part by weak auto sales.
Paul Ashworth, chief U.S. economist at Capital Economics, said Hurricane Harvey, which hit Texas and Louisiana in late August, was at least partially responsible for weak spending in August, and "the September spending figures could remain depressed" due to Hurricane Irma. He also said unseasonably cool temperatures in the Northeast and power outages in storm-affected areas could have reduced utility spending during the month.
More broadly, Mr. Ashworth predicted in a note to clients that spending growth will remain healthy over the next 18 months, "with confidence strong, the growing possibility of tax cuts and labor market conditions still solid."
Consumer spending accounts for more than two-thirds of total U.S. economic output, and a pickup in outlays helped boost overall growth this spring. But economists think the powerful hurricanes that hit the U.S. in August and September will depress economic activity during the third quarter, which ends this weekend. Growth would likely rebound in subsequent quarters as rebuilding efforts take shape.
Forecasting firm Macroeconomic Advisers on Friday projected a 2.4% annual growth rate for gross domestic product in the third quarter, down from the second quarter's 3.1% GDP growth rate. The Federal Reserve Bank of Atlanta's GDPNow model predicted third-quarter growth at a 2.3% rate.
The Commerce Department also said the personal-savings rate in August was 3.6%, steady from the prior month at its lowest level since the end of last year. It was above 6% as recently as the fall of 2015 but has fallen sharply since then.
Mr. Daco, the Oxford Economics economist, predicted continued sluggish income growth will force consumers to moderate their spending, a process that may already be under way. "The current 'savings dip' isn't sustainable on a long-term basis," he said in a note to clients.
--Sharon Nunn contributed to this article.
Write to Ben Leubsdorf at email@example.com
(END) Dow Jones Newswires
September 29, 2017 15:02 ET (19:02 GMT)