The PCE price index increased by 0.4% vs. an estimated 0.5% monthly. Likewise, the core PCE price index increased by 0.1% vs. an estimated 0.2%.
The Fed’s decision to maintain the interest rate within the 5.25 – 5.50% range at the last FOMC meeting appears to have been justified. Friday’s Bureau of Economic Analysis report shows that the Personal Consumption Expenditures (PCE) price index came in under expectations.
On a monthly basis (for August), the PCE price index increased by 0.4% vs. an estimated 0.5%. Likewise, the monthly core PCE price index increased by 0.1% vs. an estimated 0.2%. For both versions annually, PCE matched expectations at 3.5% and 3.9% (core).
This marks the lowest PCE rise since September 2021. Of the different inflation indicators, core PCE is the preferred gauge for the Federal Reserve as it excludes more volatile items like food and energy. As such, the core PCE price index is more useful to determine monetary policy.
Equally, this inflation gauge is closely watched for the same reason, often impacting market moves.
Market’s Reaction to Soft Inflation Report
Tracking the 30 largest American blue chip stocks, the (DJI) opened 0.64% higher on Friday, rising by 216.27 points. Other benchmarks were equally receptive to positive PCE news. The (SPX) rose by 0.66%, while the tech-focused (IXIC) jumped by 1.03%.
Interestingly, dropped sharply in the afternoon, going to $26.7k, only to stabilize at $26.9k again. This is not surprising, given Bitcoin’s perception as a hedge against inflation. If the inflation trends downwards, demand for bitcoins may be less pressing.
On the other hand, if the Federal Reserve is now less likely to raise interest rates and more likely to accelerate rate cuts, this would be favorable for crypto investors. After all, the historic inflow of cheap capital during 2020/21 allowed Bitcoin to reach an all-time high price of $68,789 in November 2021.
Regarding the dollar itself, softer inflation figures slightly raised the , which is often inversely related to Bitcoin’s price moves. This played out again on Friday.