Key Takeaways
- The July Personal Consumption Expenditures index showed that overall prices rose by 2.6% over the past year, meeting economists’ forecasts and matching the prior month’s results.
- The closely followed core PCE inflation reading ticked slightly higher from the prior month to 2.9%.
- Federal Reserve officials are closely monitoring inflation ahead of a possible interest rate cut next month. Friday’s inflation reading will likely cause central bankers to focus even more on next week’s jobs report.
The Federal Reserve’s preferred inflation measurement stayed higher than the central bank’s target in July, but it didn’t dash traders’ hopes for a rate cut.
The July Personal Consumption Expenditures (PCE) index showed that prices rose by 2.6% from a year ago, while the “core” measurement that excludes fuel and food prices was at 2.9%. Both readings were in line with projections from economists surveyed by Dow Jones Newswires and The Wall Street Journal.
Overall, price levels stayed steady from June’s PCE reading, though the core PCE measurement ticked higher than the prior month, according to the Bureau of Economic Analysis data. It’s the third straight month that core PCE has moved higher. The Federal Reserve looks at the core PCE to gauge inflation against the target rate of 2%.
The in-line inflation reading comes as Fed officials evaluate whether to lower interest rates at its upcoming meeting on Sept. 16-17. Fed Chair Jerome Powell opened the door to a rate cut during a speech last week, pointing to weakness in the job market.
Usually, inflation running higher than the Fed’s target would be a sign to central bankers that they need to hold rates higher to stamp out lingering price pressures. Economists said Friday’s inflation report will focus even more on next week’s jobs report.
“While the Fed will likely cut rates to accommodate the labor market, it may be hard for them to move as quickly or aggressively as they’d like with inflation moving higher,” said Bret Kenwell, eToro US investment analyst.
After the PCE report was released, traders priced in an 87% chance that the Fed will cut rates at its next meeting, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. That was slightly higher than their expectations from the day prior.
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