Inflation edges up in July, prompting the Federal Reserve to gear up for its first rate cut in years
Inflation in July saw a slight increase, as reflected in a key measure closely watched by the Federal Reserve, according to CNBC.
This comes as the central bank prepares for its first interest rate cut in more than four years. The Commerce Department reported that the personal consumption expenditures (PCE) price index, a primary inflation gauge, rose by 0.2 percent for the month, matching Dow Jones estimates.
Year-over-year, the index increased by 2.5 percent.
Core PCE, which excludes volatile food and energy prices, also rose by 0.2 percent in July and by 2.6 percent from the same period last year.
This year-over-year figure came in slightly below the expected 2.7 percent. The Federal Reserve typically emphasizes the core reading as a more accurate measure of long-term inflation trends. Both core and headline inflation on a 12-month basis remained consistent with June’s figures.
Another critical measure for the Fed, core prices excluding housing, increased by 0.1 percent for the month. However, shelter costs, a persistent component of inflation, continued to rise, with a 0.4 percent increase in July.
The Bureau of Economic Analysis also reported that personal income grew by 0.3 percent, slightly exceeding the 0.2 percent forecast, while consumer spending rose by 0.5 percent, in line with expectations.
Despite solid consumer spending, the personal savings rate fell to 2.9 percent, its lowest level since June 2022.
From a broader perspective, inflation showed little change over the past month. Goods prices fell by less than 0.1 percent, while services prices increased by 0.2 percent. Over the past year, goods prices declined by less than 0.1 percent, while services saw a 3.7 percent increase.
Additionally, food prices rose by 1.4 percent, and energy prices accelerated by 1.9 percent.
Market reactions to the report were minimal, with equity futures indicating a slightly higher opening on Wall Street and Treasury yields rising. Joseph Brusuelas, chief economist at RSM, suggested that this data points to the re-establishment of price stability in the American economy.
He added that the US economy is poised to grow at or above the long-term rate of 1.8 percent as the Federal Reserve begins its rate-cutting campaign, which should support growth and hiring.
Brusuelas also noted that the data supports increased risk-taking by the commercial sector and investors as interest rates decline.
As the market anticipates a rate cut in September, there is uncertainty regarding whether the Federal Reserve will opt for a quarter-percentage-point reduction or a more aggressive half-point cut.
Following the report's release, market sentiment shifted slightly in favour of a quarter-point reduction, reducing the likelihood of a 50-basis point cut to 30.5 percent, as indicated by the CME Group’s FedWatch gauge.
In recent remarks, Federal Reserve officials, including Chair Jerome Powell, have expressed confidence in the progress towards the Fed’s 2 percent inflation target. The focus is now expected to shift from solely addressing inflation to also supporting the labour market.
Although the unemployment rate remains low at 4.3 percent, it has been trending upward over the past year. Surveys suggest a slowdown in hiring and growing concerns among workers about job availability.
Looking ahead, attention will turn to the August nonfarm payrolls report, which is expected to show an increase of approximately 175,000 jobs, according to FactSet.
