On Friday local time, the United States will release the August Consumer Expenditure Price Index (PCE).

With the interest rate cut now in place, the importance of inflation data has diminished, given the Federal Reserve's repeated mentions of the increasingly balanced dual mandate risks. However, considering the resistance and uncertainty faced as future prices move towards 2%, an unexpected rise in the data could bring greater uncertainty to the accommodative policy path following the first rate cut.

Core PCE may rebound

Data released by the US Department of Commerce last month showed that the overall Personal Consumption Expenditure (PCE) price index and core PCE rose by 2.5% and 2.6% year-on-year in July, respectively, both unchanged from the increases in June.

A summary of Wall Street institutions' forecasts by Yicai found that, after referencing the latest CPI and PPI data, the August PCE may increase by 2.3% year-on-year, setting a new low since 2021, with a month-on-month increase of 0.2%. Against the backdrop of basically stable food prices, energy prices are expected to be the main driver of the decline in prices. Affected by increased supply and demand concerns, international oil prices fluctuated and fell last month. According to data from the American Automobile Association (AAA), gasoline prices across the United States fell by about 3% on average in August.

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It is worth noting that, as an indicator more closely watched by the Federal Reserve, the core PCE growth rate, which excludes energy and food, may accelerate by 0.1 percentage points to 2.7%.

Wells Fargo said in a report sent to Yicai journalists that, judging from the July CPI report, the rebound in rent prices and the rise in service costs such as tourism and leisure will bring disturbances. At the same time, the adverse base effect also brings stickiness to the data. The Atlanta Fed tool shows that the US PCE may continue to remain around 2.7% in September.

Also announced alongside the PCE are the monthly rates of personal income and personal expenditure. Both have significant reference value for predicting future price trends. Institutions expect that the income month-on-month rate will accelerate to 0.4%, and the expenditure month-on-month rate will fall from 0.5% to 0.3%.

Wells Fargo believes that the resilience of US consumers this year continues to be surprising. The combination of slowing inflation and stable income growth helps to support consumers, but does not fully explain the rise in expenditure. The bank's statistics found that expenditure growth exceeded income for the sixth consecutive month in July, bringing the savings rate down to 2.9%. This is the second time since 2008 that the savings rate has fallen below 3.0%, indicating that consumers have reduced the priority of savings in order to increase expenditure.

Overall, Wells Fargo expects that consumer expenditure will face further pressure before the end of the year, as a weak labor market leads to slower wage growth. If households continue to consume, savings will further deteriorate, making consumers more economically vulnerable over time.Multiple Factors May Affect the Pace of Interest Rate Cuts

A week ago, the Federal Reserve initiated a new round of interest rate cuts with a 50 basis point reduction.

However, the future policy path still largely depends on data, and Federal Reserve Chairman Powell reiterated the stance of this meeting's decision, emphasizing that future employment reports and inflation data will influence the policy at the early November meeting.

Bob Schwartz, a senior economist at Oxford Economics, previously stated in an interview with Yicai Media that as the Federal Open Market Committee (FOMC) shifts its focus from inflation to the labor market, the initial stage of the Federal Reserve's normalization cycle is somewhat more aggressive than expected. Considering the weakness in the job market, the dual mandate is beginning to tilt again.

With a little over a month until the next meeting, Schwartz believes the Federal Reserve may be acting out of concern that overly cautious actions could fall behind the curve. Historically, when the labor market begins to collapse, an economic recession is inevitable. Amidst pressure on low-income groups, it is uncertain how long the strong wealth growth of middle and high-income populations can continue to drive consumption.

In fact, whether it is the dot plot of interest rates or the latest speeches, there is significant disagreement within the Federal Reserve about the future policy path. Bowman, a Federal Reserve governor who voted against the decision at the September meeting, said this week that the possibility of stagnation in progress against inflation cannot be ruled out.

It is important to note that the S&P U.S. Purchasing Managers' Index (PMI) released on Monday showed an increase in cost pressures on the corporate side. As manufacturing continues to decline and business confidence worryingly decreases, some warning lights are flashing, especially regarding the economy's dependence on the service sector, "added Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. The acceleration of inflation again indicates that the Federal Reserve cannot shift its focus away from inflation targets while seeking to maintain economic improvement.

Boris Schlossberg, a macro strategist at the asset management firm BK Asset Management, told Yicai Media that hawkish members within the Federal Reserve still believe there are some upside risks to inflation. "With the re-emergence of sustained pressure on housing and service costs, the path to normal inflation has encountered setbacks. Coupled with the potential uncertainty of the election, this may keep the Federal Reserve cautious in its policy options for the remaining two meetings of the year."

Schwartz expects that after a 50 basis point rate cut, if the economy operates as predicted by the Federal Reserve, only a 25 basis point rate cut may be needed in November and December. If there are any surprises in the labor market before the U.S. election, the scale will tip again towards a 50 basis point rate cut in November.