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Inflation data surge shouldn’t derail another Fed rate cut, economists say

Scott Gamm

A key measure of inflation, the consumer price index, rose to an 11-year high in August, according to new data released Thursday from the Bureau of Labor Statistics. But that shouldn’t throw cold water on the Federal Reserve’s expected rate cut next week, economists say.

The core consumer price index, which doesn’t account for food and energy prices, rose 2.4% year-over-year as of August, exceeding the Fed’s 2% inflation target. Within the CPI, prices for used cars and medical goods and services all increased.

But the consumer price index isn’t the Fed’s preferred measure of inflation - the personal consumption expenditure price index (PCE) is. That index calculates inflation differently.

U.S. Federal Reserve Chairman Jerome Powell speaks during the "The Economic Outlook and Monetary Policy" panel discussion hosted by the Swiss Institute of International Studies at the University of Zurich in Zurich, Switzerland September 6, 2019. REUTERS/Arnd Wiegmann

“Healthcare is important; medical care services surged 0.9% in CPI but that won't happen in PCE,” wrote Neil Dutta, head of U.S. economics at Renaissance Macro Research, in a note to clients following the CPI’s release. “CPI covers out of pocket expenses only while PCE covers payments made on behalf of you.”

Dutta is expecting a 1.7% rise in core PCE for August, which would be below the Fed’s 2% target. That figure is scheduled to be released by the Bureau of Economic Analysis later this month.

Typically, the Fed cuts interest rates to spur or create inflation, hence why some market participants may question the idea of a near-term rate cut after reading Thursday’s inflation report.

“[The CPI reading] won’t stop the Fed from cutting interest rates again next week, but it does provide further reason to believe that market expectations of significant further easing will ultimately be disappointed,” wrote Andrew Hunter, senior U.S. economist at Capital Economics, in a note to clients Thursday.

European Central Bank cuts interest rates

As the market awaits next week’s Fed decision, the European Central Bank on Thursday announced a cut to its deposit rate - the first cut in three years.

That prompted admiration from President Trump on Twitter, who has long criticized Fed Chair Jerome Powell for raising rates too fast last year and not following other central banks around the world, like the ECB, in providing more monetary stimulus.

Here’s what President Trump tweeted following the ECB announcement:

“European Central Bank, acting quickly, Cuts Rates 10 Basis Points.. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!”

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Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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