Overall PCE inflation rose in July

The Federal Reserve has warned for months that restoring rapid inflation to a normal pace is likely to be a difficult process, a fact that the Fed has emphasized. new data Thursday showed a closely watched measure of inflation rising in July.

The report also indicated that consumers are still opening their wallets to a range of goods and services, from restaurant meals to medicines and pet-related products, in a sign of momentum that could keep central bankers in check. And if Americans are still willing to pay up to buy the products they need and want, that could allow companies to continue to charge more, making it more difficult to stamp out inflation entirely.

The personal consumption expenditures price index — the Fed’s preferred measure of inflation — rose 3.3 percent in July from a year earlier, compared to 3 percent in the last report. While this is down from last summer’s peak of 7 per cent, it is still well above the 2 per cent growth rate targeted by the Fed.

Central bankers tend to closely monitor a measure of core inflation, which excludes volatile food and fuel prices to give a clearer idea of ​​the underlying price direction. This measure also rose, reaching 4.2% after 4.1% in June.

Inflation is expected to slow later this year and into 2024 – and there are encouraging signs under the surface that it is in the process of moderating – meaning Thursday’s report is likely to represent a bump in the road rather than a reversal of recent progress towards cooler prices. . But with inflation numbers soaring, Fed officials have been reluctant to declare victory.

“In the details, you can find reasons not to worry,” said Blarina Orochi, chief US economist at T Row Price. But she figured that the Fed would likely take a similar view to hers on the overall message: “I continue to worry that the core of monetary policy remains sticky.”

This caution was reinforced by the sudden momentum in the economy a year and a half after Fed policymakers raised interest rates. The Fed’s interest rate is now set at 5.25 to 5.5 percent, up from near zero in March 2022, which makes it more expensive to borrow to buy a house or car or to expand a business.

Despite this, the labor market remained strong. The employment report due out on Friday is expected to show that while businesses added fewer jobs in August, the unemployment rate remained very low at 3.5 percent. Strong employment and decent wage growth help people keep spending money: New consumption data released Thursday showed that personal spending rose 0.8% in July from the previous month, more than economists had expected and at a solid pace.

Even after adjusting for inflation, it increased by 0.6 percent, compared to 0.4 percent in the previous report.

“All in all, this suggests that real growth is very strong,” said Neil Dutta, head of economic research at Renaissance Macro, which he said should keep the Fed cautious in the coming months. Meanwhile, the report contained good news: “Inflationary momentum appears to be somewhat bearish, which is encouraging.”

And while the year-on-year inflation rate – 3.3 per cent – picked up slightly in July, analysts such as Mr. Dutta closely monitor month-to-month price increases. It was these more fit in recent months.

The rise in annual PCE inflation was widely expected. Various data points that feed into this number, including the CPI inflation report, will be released earlier in the month. The measure remains a focus on Wall Street and in policy circles despite its late release because it is the measure the Fed uses to set its official inflation target.

Fed officials will be watching the data over the next few weeks as they consider what to do with interest rates at their meeting on September 20. Policymakers said the meeting was “live”, meaning they would either raise interest rates or keep them on hold, but several indicated that at this point they feel they can be patient in making a decision. moves.

“Given how far we’ve come, in upcoming meetings we will be in a position to proceed carefully as we assess incoming data, evolving expectations and risks,” Fed Chairman Jerome Powell said at a news conference. High level speech last week.

Many investors believe an eventual increase in price Possibly later this yearBut later – perhaps at the central bank meeting in November.

Even if the Fed doesn’t raise borrowing costs in a few weeks, policymakers will release a new set of economic forecasts that will show whether they still expect a rate hike this year, and how far they expect inflation to slow by 2020. End of 2023 and until 2024.

Given this, Wall Street will closely analyze some of the incoming data points, including the jobs report due on Friday and Consumer Price Index Inflation Report On September 13, to try to guess what the Fed will signal.

“Tomorrow’s employment data will be very important,” Ms. Orochi said. She said she would look for more signs that the labor market is slowing to a normal level of strength, which could increase the likelihood of inflation slowing without a major economic recession, in what is sometimes called a “full contraction.” But she’s not sure if such a benign outcome is possible.

“It feels too good to be true,” she said.