A measure of inflation in personal consumption expenditures rose in July. Will the Fed raise interest rates again?

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The Fed’s closely monitored measure of inflation rose in July, raising the odds that the Fed will raise interest rates again this year.

Consumer prices rose 3.3% from a year earlier, above the 3% pace in June but below the 40-year high of 7% in June 2022, the Commerce Department said Thursday.

Much of the rally in July was due to the fact that inflation had already started to slow somewhat by July 2022, so the gap in prices between that month and July 2023 was larger.

On a monthly basis, prices rose 0.2%, in line with the June increase, according to the personal consumption expenditures price index.

However, the rally in July was sharper before numbers were rounded.

At the same time, consumer spending is accelerating in a development that could maintain upward pressure on prices.

What is core inflation for personal consumption expenditures?

A measure of inflation that excludes volatile food and energy rose 0.2%, similar to June. That pushed the annual increase in so-called core prices to 4.2% from 4.1% in the previous month.

Overall, the report reveals a slightly larger monthly rise in inflation than the CPI released earlier this month. Both reports show a decline in the prices of commodities, such as used cars, as supply chain problems related to the pandemic are resolved.

But prices for services such as health care, financial advisory, transportation and insurance rose the most in Thursday’s report. This is partly because these services are weighted more heavily in the PCE index than in the CPI and that higher wholesale costs play a larger role, Barclays wrote in a research note.

What is hyperinflation?

Fed Chairman Jerome Powell said officials are very concerned about stubborn inflation for such services. It excludes volatile food, energy and housing, and its costs are closely related to rapidly rising employee wages. Prices for the so-called “super-core” services jumped 0.5% in July after rising 0.3% in the previous month. .

This could boost the odds of another rate hike since the Fed has traditionally focused more on personal consumption expenditures than CPI inflation.

“We remain skeptical that inflation is on track to return to the (Fed’s) 2% target without significant easing of labor market conditions,” Barclays wrote in a research note. The company expects another quarter-point rate hike in November, while Nationwide economist Ben Ayers thinks the Fed may raise interest rates again in September.

Friday’s report is expected to show that US employers added 168,000 jobs in July, a significant slowdown from earlier this year, but unemployment remained near its lowest level in half a century at 3.5%.

What is the current federal interest rate?

However, macroeconomics Pantheon believes the Fed will hold its key interest rate steady for the rest of the year after raising it by 5.25 percentage points in 16 months — the most aggressive wave of interest rate increases in four decades. The rate ranges from 5.25% to 5.5%, the highest in 22 years.

Meanwhile, household spending rose 0.8% in July, partly supported by Amazon Prime Day sales, after an upwardly revised 0.6% rise in June. Income rose 0.2%, slightly lower than expected. Overall, incomes have outpaced inflation in recent months, but that trend appears to have stalled in July, giving consumers slightly less purchasing power.

However, a strong increase in spending could push prices higher and, along with a strong economy, help push the Fed to raise interest rates again this year.

However, consumption may slow this fall as many Americans resume repayment on student loans that were suspended under coronavirus relief legislation. Households are also close to exhausting $2.6 trillion in federal stimulus checks and other pandemic-related savings.

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