Inflation rose slightly in July, according to a measure favored by the U.S. Federal Reserve as it prepares for its first interest rate cut in over four years.
The Commerce Department reported on Friday that the price index for personal consumption expenditures rose 0.2 percent month-on-month and 2.5 percent year-on-year, exactly in line with the Dow Jones consensus estimates.
Excluding volatile food and energy prices, core PCE also rose 0.2% for the month, but was 2.6% above the year-ago figure. The 12-month figure was slightly lower than the 2.7% estimate.
Fed officials tend to focus on the core reading because it is a better indicator of long-term trends. Both core inflation and headline inflation on a 12-month basis were at the same levels as in June.
Core prices excluding housing rose just 0.1 percent month-on-month. While other components of inflation are easing, housing proved stubborn, rising another 0.4 percent in July, according to Friday's report.
Elsewhere in the report, the department's Bureau of Economic Analysis said personal income rose 0.3%, slightly more than the 0.2% estimate, while consumer spending rose 0.5%, in line with the forecast. Spending remained solid, although the personal savings rate fell to 2.9%, the lowest since June 2022.
From a price perspective, inflation was little changed last month. The BEA said goods prices fell by less than 0.1 percent, while services rose by 0.2 percent.
On a 12-month basis, goods prices also fell by less than 0.1 percent, while services rose by 3.7 percent. Food prices rose by 1.4 percent and energy prices accelerated by 1.9 percent.
Markets barely reacted to the news. Stock futures pointed to a slightly higher opening on Wall Street, and Treasury yields also rose.
The data “point to a restoration of price stability across the American economy,” wrote Joseph Brusuelas, chief economist at RSM.
“The American economy is likely to grow at the long-term rate of 1.8% or more as the Fed begins its campaign of rate-cutting, which should bring growth and hiring under control,” he added. “These data support private sector risk appetite in the face of falling interest rates and investors now hoping for a sustained increase in economic growth.”
Markets are pricing in the probability of a September rate cut at 100% over time. The only uncertainty is whether the Fed will cut the benchmark rate gradually by a quarter of a percentage point or be more aggressive and cut it by half a percentage point.
Following Friday's release, market prices trended slightly more toward a quarter-point, or 25 basis point, cut, according to CME Group's FedWatch indicator, reducing the probability of a 50 basis point move to 30.5 percent.
In recent days, policymakers such as Chairman Jerome Powell have expressed confidence that inflation is moving back toward the Fed's 2% target.
The Fed is now expected to shift from its almost exclusive focus on reducing inflation to an equally strong focus on supporting the labor market. While the unemployment rate is still low at 4.3%, it has risen over the past year. Surveys suggest a slowdown in hiring and that finding work is becoming increasingly difficult.
Attention now turns to the nonfarm payrolls report for August, due in a week, which is expected to show an increase of about 175,000 jobs, according to FactSet.
Comments are closed.