Inflation rose slightly in July, according to the Federal Reserve’s preferred measure, as the central bank prepares to cut interest rates for the first time in more than four years.
The Commerce Department said Friday that its personal consumption expenditures price index rose 0.2% from the previous month and 2.5% from a year earlier, exactly in line with the Dow Jones consensus estimate.
Core PCE, which excludes volatile food and energy prices, also rose 0.2% for the month but was up 2.6% year-on-year. The 12-month figure was slightly lower than expectations for 2.7%.
Fed officials tend to emphasize core inflation as a better gauge of longer-term trends. Both the 12-month core and headline inflation rates were unchanged from June.
Another key measure for the Fed, core prices excluding housing, rose just 0.1% from the previous month.Home prices have proven stubborn as other components of inflation eased, rising 0.4% in July, according to a report on Friday.
Elsewhere in the report, the Bureau of Economic Analysis said personal income rose 0.3%, slightly above expectations of 0.2%, and consumer spending rose 0.5%, in line with expectations. The personal savings rate fell to 2.9%, the lowest since June 2022, but spending remained strong.
From a component perspective, inflation was little changed over the past 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 less than 0.1%, while services rose 3.7%. Food prices rose 1.4% and energy prices increased 1.9%.
Markets barely reacted to the news, with Wall Street stock futures opening modestly higher and Treasury yields also rising.
The data “suggests that price stability has returned across the US economy,” RSM chief economist Joseph Brusuelas wrote.
“The U.S. economy is expected to maintain or even exceed its long-term growth rate of 1.8% or higher as the Fed begins its interest rate cut policy, which should support growth and employment,” he added. “The data supports the commercial sector’s risk-taking in the face of lower interest rates and investors’ current expectation of a sustained expansion in the economy.”
The report comes at a time when markets are pricing in a 100% chance of a September rate cut, with the only uncertainty being whether the Fed will take a gradual step of cutting its benchmark rate by 0.25 percentage points or go for a more aggressive 0.5 percentage point cut.
After Friday’s announcement, markets were leaning slightly toward a quarter-point (25 basis points) cut, while the likelihood of a 50-basis-point cut fell to 30.5 percent, according to CME Group’s FedWatch indicator.
In recent days, policymakers including Chairman Jerome Powell have expressed confidence that inflation is moving back toward the Fed’s 2% target.
The Fed is expected to shift from a near-total focus on tackling inflation to at least an equal focus on supporting the labor market. The unemployment rate remains low at 4.3 percent but has been trending higher over the past year, and surveys suggest hiring is slowing and workers are finding it harder to keep jobs.
Attention will now turn to the August nonfarm payrolls report, due in a week, which is expected to show an increase of about 175,000 jobs, according to FactSet.
