Fed officials focus on key inflation data, signalling a shift towards supporting the labour market
Federal Reserve officials are preparing to review their key inflation measure on Friday, which could play a significant role in their decision on interest rates in September, according to CNBC.
The Commerce Department will release the personal consumption expenditures (PCE) price index at 8:30 am ET. This index is a broad measure of what consumers pay for various goods and services, also reflecting their spending patterns.
The Fed closely monitors several indicators to assess inflation, but the PCE index is their primary tool, especially for quarterly projections. Policymakers focus on the core PCE measure, which excludes food and energy, to guide interest rate decisions.
The PCE is preferred over the consumer price index (CPI) because it considers changes in consumer behaviour, such as substituting goods, and provides a more comprehensive view of inflation.
For July, the Dow Jones consensus expects the PCE to show little change from recent trends. Both headline and core prices are anticipated to increase by 0.2 percent month-over-month, with annual gains of 2.5 percent for headline inflation and 2.7 percent for core inflation.
The forecast for core PCE suggests a slight increase from June, while the all-items measure remains steady.
If these readings match the forecasts, they are unlikely to deter the Fed from implementing the expected interest rate cut at their September 17-18 meeting
Beth Ann Bovino, chief economist at US Bank, commented that the data would likely serve as further confirmation that inflation is stabilizing. She noted that any minor increases would likely be due to base effects and would not change the Fed's outlook.
Although the Fed has not yet declared victory over inflation, recent statements suggest a more optimistic view. The central bank aims for 2 percent annual inflation.
While PCE readings have not dipped below this level since February 2022, Fed Chair Jerome Powell recently expressed growing confidence that inflation is moving back toward the target.
However, Powell also raised concerns about the slowing labour market, indicating a possible shift in focus from inflation control to supporting employment.
Powell highlighted that “the upside risks to inflation have diminished,” while “the downside risks to employment have increased.” This shift suggests that the Fed may prioritize preventing a downturn in the labour market and a broader economic slowdown over the PCE data.
More attention could be directed to the September 6 report on August nonfarm payrolls.
Bovino echoed this shift in focus, stating that the Fed is likely to concentrate more on job market conditions. She noted that the Fed appears increasingly concerned about potential weaknesses in the labour market, which could influence their monetary policy decisions.
In addition to the PCE data, the Commerce Department will also report on personal income and consumer spending for July. Personal income is expected to rise by 0.2 percent, while consumer spending is projected to increase by 0.5 percent.
