In July, inflation slightly increased, a key measure for the Federal Reserve as it readies for its first interest rate cut in over four years. The Commerce Department revealed that the personal consumption expenditures price index went up by 0.2% for the month and 2.5% from a year earlier, aligning with Dow Jones estimates. Excluding food and energy prices, core PCE also rose by 0.2% for the month and 2.6% from a year ago, slightly below the 2.7% forecast.
Fed officials typically prioritize the core reading for long-term trends. Both core and headline inflation over a 12-month period remained the same as in June. Core prices, excluding housing, increased by 0.1% for the month. Shelter costs continued to rise, up by 0.4% in July.
Additionally, the Bureau of Economic Analysis reported that personal income rose by 0.3%, slightly higher than the 0.2% estimate, while consumer spending increased by 0.5%, in line with predictions. Despite a decrease in the personal savings rate to 2.9%, the lowest since June 2022, spending remained robust.
Goods prices saw minimal change over the past month, with a slight decrease, while services increased by 0.2%. Over a 12-month period, goods prices dropped slightly, and services surged by 3.7%. Food prices rose by 1.4% and energy costs accelerated by 1.9%.
The market response to the news was subdued, with equity futures indicating a slightly higher opening on Wall Street and Treasury yields also rising. Chief economist at RSM, Joseph Brusuelas, noted that the data suggests a re-establishment of price stability in the U.S. economy, supporting growth and hiring.
Market expectations now point to a 100% likelihood of a rate cut in September, with uncertainty surrounding the magnitude of the cut. Following the report, the probability of a 50 basis point reduction decreased to 30.5%, favoring a quarter-point cut. Federal Reserve Chair Jerome Powell and other policymakers have expressed confidence in inflation returning to the Fed’s 2% target.
The Fed is anticipated to shift focus from solely addressing inflation to also supporting the labor market, given signs of a slowdown in hiring and concerns among workers about job availability. The upcoming nonfarm payrolls report for August is expected to show an increase of around 175,000 jobs, according to FactSet.
