Key Points:
- Core personal consumption expenditures (PCE) prices increased by 0.2% in July and 2.6% over the past year, slightly below the 2.7% estimate.
- Overall inflation matched forecasts at 0.2% for the month and 2.5% for the year.
- Personal income rose by 0.3%, slightly above the 0.2% estimate, while consumer spending increased by 0.5%, in line with expectations.
Inflation edged up in July, according to the Federal Reserve’s favored measure, as the central bank prepares for its first interest rate cut in over four years.
The Commerce Department reported that the personal consumption expenditures (PCE) price index rose 0.2% in July and 2.5% from a year ago, aligning with Dow Jones consensus estimates.
Excluding volatile food and energy prices, core PCE also increased by 0.2% for the month and 2.6% over the year, slightly below the 2.7% estimate.
Fed officials focus more on the core PCE as a better indicator of long-term inflation trends. Both core and headline inflation on a 12-month basis were unchanged from June.
Core prices, excluding housing, rose just 0.1% in July. Meanwhile, shelter costs continued to rise, increasing by 0.4% for the month.
The Bureau of Economic Analysis (BEA) also reported that personal income grew by 0.3%, slightly above the 0.2% forecast, while consumer spending increased by 0.5%, matching expectations. Despite solid spending, the personal savings rate fell to 2.9%, the lowest since June 2022.
Goods prices fell slightly, while services rose by 0.2% in July. Over the past year, goods prices decreased by less than 0.1%, while services surged by 3.7%. Food prices increased by 1.4%, and energy prices rose by 1.9%.
Markets showed little reaction to the data, with equity futures pointing to a slightly higher opening on Wall Street and Treasury yields rising.
Joseph Brusuelas, chief economist at RSM, noted that the data “points to the re-establishment of price stability across the American economy” and suggests that the economy is poised to grow at or above the long-term 1.8% rate as the Fed begins its rate-cutting campaign.
With markets fully expecting a rate cut in September, the focus is on whether the Fed will lower rates by a quarter-point or a more aggressive half-point. After the data release, market expectations leaned slightly towards a quarter-point reduction.
Fed Chair Jerome Powell and other policymakers have expressed confidence that inflation is returning to the Fed’s 2% goal. The Fed is now expected to balance its focus on lowering inflation with supporting the labor market. Although the unemployment rate remains low at 4.3%, it has been gradually rising, with signs of slowing hiring and increased job scarcity.
Attention now shifts to the upcoming nonfarm payrolls report for August, expected to show an increase of around 175,000 jobs, according to FactSet.
