Financial Analyst/Content Writer, RADEX MARKETS
Lawrence J. came from a strong technical and engineering background before pivoting into a more financial role later on in his career. Always interested in international finance, Lawrence is experienced in both traditional markets as well as the emerging crypto markets. He now serves as the financial writer for RADEX MARKETS.
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On Wednesday, the US Bureau of Economic Analysis released the latest PCE price index, surprising financial markets with lower-than-expected inflation figures for the month of August.
The headline inflation figure came in at 0.3% month-over-month, punching lower than forecasts of 0.4%, while the core element of the index, which excludes volatile components such as energy and food, came in at 0.2%, also beating expectation of 0.3%.
Year-over-year, headline inflation remained steady at 3.4%, as did the core constituent at 3.0%, with both figures falling short of predictions of 3.7% and 3.3% respectively.
Alongside the August inflation stats, the Bureau also published revisions for the prior month, as well as for the first quarter of the year. Annual figures for July, both headline and core, were revised to the downside by 30 basis points, Q1 headline PCE was revised from 4.4% to 3.9%, while the core PCE figure was nudged down from 4.6% to 4.2%.
Taken together, the latest publication from the BEA significantly changes the outlook for future interest rate adjustments on the dollar. CME’s Fedwatch tool immediately reflected the shift, pulling the implied probability of an October rate hike down to just 37%. Despite this, a December 25-bps bump remains stubbornly on the cards.
Part of the reason for the firm drop in prior inflation estimates is because the BEA recently changed its methodology for calculating certain components of the index, namely computer software, legal fees and investment advice.
The computer software element of the calculation has been the source of some controversy over the last couple of years. Economists on Wall Street and at the Fed had both pointed out that because of the way such components were defined, the old formula significantly over-counted software inflation, making the overall picture look worse than it actually was.
The previous calculation factored in hardware costs, which have gone through the roof in recent times due to the explosion in the artificial intelligence sector, while the new calculation focuses more narrowly on digital services. Essentially, the BEA realised that counting semiconductor shortages as software price hikes was not an adequate reflection of reality.
Beyond the latest inflation reading, the Bureau also published its third and final estimate on second quarter GDP growth. The previous figure of 1.5% was bumped up to 2.2% annualised, while first quarter growth was revised up to 2.5% from the 2.1% reported on previously.
Consumer spending and private business investment were the main drivers behind the revision. Consumer spending, which accounts for over two-thirds of all US economic activity, increased at 3.8% annually, while business investment climbed to a massive 9% as a result of the billions of dollars being poured into AI expenditures.
The major factor dragging down GDP in the United States is in fact the huge growth in imports, which is also in large part because of the AI boom. Businesses have spent super aggressively this year on AI infrastructure, resulting in the US as a whole sucking in a massive wave of foreign goods, particularly computer chips and technology components, all of which have become notoriously expensive. The underlying strength of the US economy is in fact somewhat hidden by the 2.2% figure; without the massive surge in imports the final GDP result would be notably higher.
About the Author
Lawrence J. came from a strong technical and engineering background before pivoting into a more financial role later on in his career. Always interested in international finance, Lawrence is experienced in both traditional markets as well as the emerging crypto markets. He now serves as the financial writer for RADEX MARKETS.
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