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Inflation ticked up slightly in July, according to the Federal Reserve’s favored inflation gauge, the personal consumption expenditures (PCE) price index. The Commerce Department reported Friday that core inflation, which strips out volatile food and energy prices, rose at a 2.9% annual rate. This is a slight nudge up from June’s figure and the highest annual rate since February, although it matched economists’ expectations.
The core PCE index saw a 0.3% increase month-over-month, also in line with predictions. Including food and energy, the overall PCE index climbed 2.6% annually and 0.2% monthly, again meeting forecasts.
While the Federal Reserve aims for 2% inflation, the latest figures indicate the economy isn’t quite there yet. Despite this, market watchers anticipate the Fed will continue lowering interest rates at its next meeting. This expectation is bolstered by comments from Fed Governor Christopher Waller, who hinted at a potentially larger rate cut if job market data continues to soften.
“The job market is key here,” notes Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “While the Fed is poised to cut rates, the extent of those cuts depends on whether a weakening job market poses a greater risk than rising inflation.” For now, a September rate cut seems likely.
Adding to the mix, consumer spending increased by 0.5% for the month, matching forecasts and demonstrating continued resilience despite the uptick in prices. Personal income also saw a boost, rising 0.4%. Following the report’s release, stock market futures remained negative while Treasury yields held steady.
A closer look reveals that a 2.7% yearly drop in energy prices helped keep overall inflation in check, while food prices rose 1.9%. The inflation picture is further nuanced by a 3.6% jump in services prices, contrasted by a modest 0.5% rise in goods prices. Month-over-month, energy prices dipped 1.1%, food prices edged down 0.1%, services climbed 0.3%, and goods slipped 0.1%.