Inflation rose in July, according to a measure favored by the Federal Reserve, as the central bank prepares to implement its first rate cut in more than four years.
THE The Commerce Ministry announced on Friday that the personal consumer spending price index rose 0.2% month-on-month and rose 2.5% year-over-year, right in line with Dow Jones consensus estimates.
Excluding volatile food and energy prices, core PCE also rose 0.2% for the month, but was up 2.6% from a year earlier. The 12-month rate was slightly softer than the 2.7% estimate.
Fed officials tend to focus more on the key reading as a better gauge of longer-term trends. Both core and headline inflation on a 12-month basis were the same as in June.
Core prices minus homes, another key metric for the Fed, rose just 0.1% on the month. As other components of inflation eased, housing has proved stubborn, again rising 0.4% in July, according to Friday’s report.
Elsewhere in the report, the ministry’s Bureau of Economic Analysis said personal income rose 0.3 percent, slightly higher than the 0.2 percent estimate, while consumer spending rose 0.5 percent, in line with the forecast. Spending continued to hold steady, even as the personal savings rate fell to 2.9%, the lowest since June 2022.
On the component side, inflation was little changed last month. The BEA said goods prices fell by less than 0.1 percent although services rose 0.2 percent.
On a 12-month basis, goods also lost less than 0.1%, while services rose 3.7%. Food prices rose 1.4% and energy accelerated 1.9%.
Markets reacted little to the news, with stock futures pointing to a slightly higher open on Wall Street and bond yields higher as well.
The data “suggests a restoration of price stability across the US economy,” wrote Joseph Brusuelas, chief economist at RSM.
“The US economy is poised to grow at or above the long-term rate of 1.8% as the Fed begins its rate-cutting campaign, which should put a floor on growth and hiring,” he added. “This data supports risk-taking by the commercial sector as interest rates decline and by investors, who are now looking at a sustained pick-up in economic expansion.”
The report comes with markets pricing in a 100% chance of a rate cut in September, with the only uncertainty being whether the Fed will take the gradual step of cutting benchmark rates by a quarter of a percentage point or be more aggressive and move half a point lower.
After Friday’s release, market prices edged slightly more toward a quarter or 25 basis point decline, reducing the likelihood of a 50 basis point move to 30.5 percent, according to CME Group’s FedWatch index.
In recent days, policymakers such as Chairman Jerome Powell have expressed confidence that inflation is returning to the Fed’s 2% target.
The Fed is now expected to shift from an almost full focus on reducing inflation to at least an equal focus on supporting the labor market. Although the unemployment rate is still low at 4.3 percent, it has risen over the past year and surveys show a slowdown in hiring and a perception among workers that jobs are becoming more difficult.
Attention will now turn to the nonfarm payrolls report for August, due in a week, which is expected to show an increase of about 175,000, according to FactSet.