US Inflation Cools to 3.4% in August, but Spending Jumps 0.9%

US consumer prices rose 3.4% in August from a year earlier, the Commerce Department said Wednesday, below the 3.7% economists expected. The reading came just over a month before US midterm elections, with prices still elevated and a challenge for many voters.

On a monthly basis, prices climbed 0.3%, up from 0.1% in July. Excluding volatile energy and food, core inflation rose 3% in August from a year ago. From July to August, core prices rose just 0.2%, up from 0.1% the previous month. Many economists had feared core prices would rise more quickly month to month.

Markets react as Fed rate path stays in focus

US markets bounced higher immediately on the new inflation reading. Investors bet that an expected interest-rate hike from the US Federal Reserve might be delayed. Even so, inflation remains above the Fed's 2% target. The monthly increase in August suggests it is not moving back toward the target anytime soon.

The Fed lifted its key short-term interest rate two weeks ago for the first time in three years to fight inflation. Most economists expect it will do so at least once more this year, possibly as soon as late next month.

"Inflation's trend is lower but still not close to their target and not improving, either," Bill Adams, chief US economist at Fifth Third Commercial Bank, said in an email.

Wednesday's report covered a key inflation gauge closely watched by the Fed, the personal consumption expenditures price index. It is similar to the higher-profile consumer price index, which was released earlier this month.

Consumers spend more even as confidence falls

High prices have cast a pall on the US economy, even as growth is mostly solid and the unemployment rate is low. On Tuesday, the Conference Board's consumer confidence survey fell to its lowest level since 2014, a period that includes both the Great Recession and a global pandemic. Americans' paychecks are growing but not as quickly as prices.

Inflation for July was previously reported at 3.7% but was revised lower to 3.4% by the government as part of an update in how it measures price changes in several categories, including investment management, computer software and accessories, and legal services. The government previously put a heavy weight on some computer accessories that have jumped in price because of outsized demand from the AI buildout. The revisions lowered that weight, so higher prices for some computer equipment are not driving up this measure of inflation as much.

Despite elevated prices, Americans accelerated spending last month. Spending jumped 0.9% from July to August, up from just 0.1% the previous month. Some of that increase was likely fueled by wealthier Americans cashing in gains from higher stock prices, a recent report from JPMorgan suggests. Other consumers may be taking on more debt to support spending. After-tax incomes, adjusted for inflation, were unchanged on a monthly basis in August, after rising 0.3% in July, the report said.

Growth picks up

Healthy consumer spending could fuel a pickup in growth. In a separate report Wednesday, the government said the economy expanded at a 2.2% annual pace in the July-September quarter. Analysts expect that to pick up to a 3% rate in the current quarter.