Why softer inflation has not ended the US rate debate
Second-quarter GDP growth was revised up by 0.7 percentage points to an annualised 2.2%, with consumer spending, investment and exports contributing to the expansion [3]. August PCE inflation was 3.4% year-on-year and core PCE was 3.0%, while consumer spending jumped 0.9% on the month, or 0.6% after adjusting for inflation [3][9]. Market-implied odds of an October rate increase consequently fell to roughly 35%-37%, down from about 51% before the inflation data [4][9].
The combination leaves the Fed facing a two-sided problem: inflation remains above its 2% target, but softer monthly price growth reduces the urgency to raise rates immediately [3][9]. Strong spending and AI-related business investment are supporting economic growth, yet higher energy prices and borrowing costs could renew price pressure or eventually weaken household demand [4][9].
Key insights
- The GDP revision was broad enough to include consumer spending, investment and exports, with real estate, information, durable-goods manufacturing, finance and insurance among the leading industry contributors [3].
- Consumers are sustaining growth partly by saving less: the saving rate fell to 4.1% in August from 4.6% in July, while inflation-adjusted disposable income was flat [9].
- Private payrolls increased by 90,000 in September after a downwardly revised 36,000 gain in August, putting the next government payroll report at the centre of the rate outlook [4].
- The market response was uneven: the Nasdaq gained 0.24%, the S&P 500 lost 0.25% and nine of the S&P’s 11 main sectors declined, even as major technology shares advanced [4].