The Personal Consumption Expenditures index, the Federal Reserve’s preferred inflation-tracking metric, inched up .2% from June to July and came in at an annual rate of 2.5%, according to a Friday report from the U.S. Commerce Department.
However, annual PCE inflation in July held steady at June’s level, a metric that is likely to be viewed positively by the Fed’s rate-setting Open Market Committee.
Core PCE, which excludes volatile food and energy prices, also moved up .2% month-over-month in July but had a slightly higher annual rate of 2.6%. Both overall PCE and core PCE for July matched June’s annual rates, an indicator that could reflect some consumer price stabilization, though rates are still running north of the Fed’s target of 2%.
The Personal Consumption Expenditures index tracks prices on a representative basket of goods and services similar to the Labor Department’s more mainstream inflation measure, the Consumer Price Index. But while the CPI price tracking is based on consumer survey results, the PCE looks at data on goods and services sold by businesses.
Last week, at an annual meeting of global central bankers in Jackson Hole, Wyoming, Federal Reserve Chairman Jerome Powell sent his strongest signal yet that the monetary body is ready to start making reductions to its benchmark federal funds rate, which has stood at a two-decade high since July 2023.
“The time has come for policy to adjust,” Powell said. “The direction of travel is clear and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
While most economists are predicting a rate cut at the Fed’s September policy meeting, Powell previously approached the topic with mostly soft indications and qualifying language. But his comments last week were widely interpreted as confirming and U.S. financial markets responded positively to the Fed chairman’s update.
Should the Fed make a downward adjustment next month, it would mark the first reduction in over four years and the start of a reversal to one of the most aggressive strategies undertaken by the U.S. central bank aiming to quash inflationary pressures fueled by unprecedented economic impacts of the COVID-19 global health crisis.
The Fed’s overnight intra-bank lending rate has stood at 5.25% to 5.5% since last summer and is the highest in 23 years after a series of 11 straight increases levied earlier by the monetary body in its efforts to cool off a U.S. economy that was running red-hot amid the pandemic recovery.
Inflation vs. unemployment
While U.S. inflation has eased to 2.5%, according to the latest Commerce Department data, it peaked at more than 7% in 2022 and was on the rise again earlier this year before tracking back to a reduction trend over the second quarter of 2024. But even as inflation has shown signs of heading reliably back to the Fed’s goal of 2%, a jobs market that has shown some unexpectedly fast slowing is a driving factor behind a September rate cut decision.
“Overall the economy continues to grow at a solid pace but the inflation and labor market data show an evolving situation,” Powell said last week. “The upside risks to inflation have diminished and the downside risks to employment have increased.”
The latest Labor Department data, released earlier this month, found U.S. businesses added 114,000 new, nonfarm payroll jobs in July, falling far short of the 175,000 expected by many economists and trailing well behind the 217,000 new jobs per month average over the past year. The annual unemployment rate hit 4.3% in July, its highest level since October 2021 and up from June’s 4.1%. The Labor Department’s July Employment Situation Summary found the number of unemployed people increased by 352,000 to 7.2 million last month. The new data reflects a significant rise in U.S. unemployment from 12 months ago, when the jobless rate was 3.5% and the number of unemployed people numbered 5.9 million.