😉 Disinflation nation

The inflation measure favored by the Federal Reserve is a whisker away from the central bank's 2% target, we learned today. But the same report showed some of the slowest growth in spending and incomes in quite some time.

• More below, plus some new thinking on how AI will affect the job market.

Today's newsletter, edited by Kate Marino and copy edited by Katie Lewis, is 718 words, a 3-minute read.

Nine days ago, the Federal Reserve cut interest rates by half a percent, playing catch-up to adjust policy for a world in which inflation has receded and the economy may be slowing. New data out this morning should make them glad they did.

Why it matters: The latest data on inflation, consumer spending and incomes affirm the outlook that undergirded last week's rate cut, that prices are converging toward the Fed's 2% target and consumers are becoming more cautious.

• It points to concerns about a slowdown in economic activity moving to the forefront, while inflation worries recede. And that supports the case for further rate cuts at the remaining two Fed policy meetings this year.

Driving the news: Over the 12 months ended in August, the Personal Consumption Expenditures Price Index targeted by the Fed has risen a mere 2.2%, the lowest since February 2021. Excluding food and energy, it has run somewhat hotter, at 2.7%.

• Meanwhile, consumer spending rose 0.2%, the softest in seven months. Adjusted for inflation, consumer spending was up only 0.1%.
• Personal income was also the coolest in more than a year, rising a mere 0.2% (0.1% adjusted for inflation).

Of note: Core PCE inflation over the last four months has run at an annualized 1.8%, below the Fed's target and the lowest since the period encompassing the onset of the pandemic in 2020.

• And that's at a time when housing inflation remains elevated — a force economists expect to fade in the months ahead.

Between the lines: Put it all together, and that is a flashing green light for the Fed to shift its focus and be on high alert for any further deterioration in spending, incomes and the job market.

• "Inflation is no longer the story in the PCE data for the Fed," wrote Jamie Cox, managing partner for Harris Financial Group, in a note. "It's now all about spending and keeping the economy strong.  
• "If you were second guessing the Fed" cutting rates a super-sized half-point last week, he added, "you aren't now."

What's next: The first major read on how the economy held up in September is due out a week from today, in the form of the jobs report.

• Today's benign August inflation and spending numbers essentially give Fed officials more latitude to set their policies based primarily on whether jobs data show a steady labor market or a faltering one.

America's modern economy with advanced manufacturing practices and new data-intensive sectors is demanding more and more energy.

Okay, but: The country isn't building the infrastructure to move energy where it's needed.

Discover four steps policymakers must take. Read more.

The big question is no longer whether AI will impact the labor market — the question is how. It is one that Federal Reserve governor Lisa Cook tried to address in a speech last night at The University of Ohio.

Why it matters: The technology has the potential to vastly improve worker productivity — but it has also stoked fears about how it might rewire the labor market and hurt employment.

• "Like many of the most significant technological innovations of the past 200 or so years — such as the steam engine, electricity, computers, and the internet — AI has the potential to affect labor productivity in a plethora of economic activities across many industries and occupations," Cook said in the speech.

Between the lines: In her second speech on the topic in a year, Cook said the effect AI will have on any given job is how exposed that sector is to potential disruption — for example, a software programmer versus a plumber.

• Cook also says there is a higher tolerance for mistakes with certain tasks, and those are more susceptible to being replaced by AI. For instance, AI technology could incorrectly summarize medical patient interviews, with little backlash.
• But for a doctor,  there is "little tolerance for misdiagnosing a patient or developing a bad treatment plan."

Cook also said that even for jobs with high vulnerability to AI, the technology could be more of a complement — not a total replacement for the job.

• That would be the case if "workers are able to offload time-intensive, but low value-added, tasks to AI and focus their time on the highest value-added tasks," Cook said.

The intrigue: How AI will affect pay and employment depends on how quickly the technology is integrated into specific sectors. "[W]e could see the effects on some workers come quickly and be more concentrated, depending on which sectors are early adopters," Cook said.

New sectors, such as large-scale data processing and advanced manufacturing, require significant energy resources.

The impact: This growing demand highlights the need for modernized infrastructure to ensure energy can be delivered efficiently and sustainably across the country.

Learn more.