US Inflation Comes in Lower Than Expected

The US inflation rate came in lower than expected in August, providing some welcome relief to markets and supporting the view of NY Fed President John Williams that there is no immediate need for another interest rate hike. The core inflation rate, which excludes food and energy prices, rose by 3% over the past year, down from a 3.3% consensus forecast.

The lower-than-expected inflation reading was due in part to revisions to the calculation of portfolio management fees, software, and some healthcare costs. This had the effect of reducing the annual rate of core inflation and making it look more likely that the Fed's 2% target will be achieved over time.

Spending growth was also stronger than expected, with nominal spending rising by 0.9% in August, driven by a strong retail sales report. This meant that real (volume) spending growth was firm at 0.6% month-over-month, contributing to an upward revision of second-quarter GDP growth to 2.2% from 1.5%.

However, household income growth was softer than expected, with August's print showing a 0.2% increase compared to the 0.5% rate anticipated. This meant that the household savings ratio dropped by half a percentage point, generating a strong nominal spending number.