Federal Reserve’s preferred inflation measure held steady at 2.5% in July

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The recent data released on Friday revealed that the Federal Reserve’s preferred measure of inflation held steady at 2.5 per cent in the year ending July. This sets the stage for the US central bank to potentially begin reducing interest rates next month.

The personal consumption expenditures price index matched economists’ expectations with a 2.5 per cent increase, slightly below the 2.6 per cent rise in June. The Fed’s target for the headline PCE index is 2 per cent annually.

The “core” PCE, which excludes volatile food and energy costs, remained at 2.6 per cent, lower than the forecasted 2.7 per cent.

This information from the commerce department follows Fed chair Jay Powell’s statement last week that it is time to consider rate cuts as inflation eases and the labor market slows.

Powell’s remarks at the annual Jackson Hole conference make it highly likely that the central bank will decrease its main rate from the current range of 5.25 to 5.5 per cent at the upcoming September meeting.

The focus among Fed observers has now shifted to the magnitude of the rate cut, with discussions on whether it will be a 0.25 or 0.5 percentage point reduction, and the potential frequency of reductions for the remainder of the year.

The S&P 500 saw a 1 per cent increase on Friday. US government bond prices experienced a slight decline after the data was released. The yield on the two-year Treasury note, which rises with falling prices, increased by 0.03 percentage points to 3.92 per cent.

Gregory Daco, EY’s chief economist, noted that the report does not suggest any upward movement in inflation. He emphasized that this data reinforces the Fed’s ability to begin rate reductions as anticipated.

This data is positive for the Biden administration and Vice President Kamala Harris’s presidential campaign, as it indicates a decline in inflation. It also helps counter attacks from Republican opponent Donald Trump regarding the cost of living, a key concern for voters.

In her recent interview since joining the presidential race, Harris mentioned her pride in bringing inflation down to less than 3 per cent. She acknowledged the need for further efforts to reduce expenses for middle- and working-class households.

Harris’s primary economic concern now is the slowing labor market and its potential impact on voter sentiment leading up to the November election.

The release of August’s job and unemployment figures next week could be crucial, following an unexpected decline in July’s data.

MetLife Investment Management’s chief market strategist, Drew Matus, highlighted the significance of the upcoming payrolls data in assessing the rate of deterioration and the Fed’s ability to address it proactively. Achieving a soft landing is challenging and requires foresight and proactive decision-making, qualities that the current Fed may need to demonstrate.

Despite concerns, the commerce department’s data on Friday did not indicate a decrease in consumer spending. Personal consumption expenditures rose by 0.5 per cent in July, compared to a 0.3 per cent increase in June. Personal income also saw a 0.3 per cent rise, up from 0.2 per cent the previous month.