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 underscored by new data on Thursday showing the closely watched measure of inflation rising again in July.

The personal consumption expenditures index rose 3.3 percent year-on-year through July, compared to 3 percent in the previous reading. 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 the previous month.

Inflation is expected to slow later this year and into 2024, so Thursday’s report is more of a bump in the road than a reversal of recent progress towards cooler prices. But with inflation numbers soaring, Fed officials have been reluctant to declare victory.

Their caution was reinforced by other recent economic data, which showed that the economy is maintaining a surprising amount of momentum after a year and a half in which 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 job market remained strong and consumers continued to shop. 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. New consumption data released on Thursday showed that Americans continued to open their wallets: personal spending rose 0.8 percent 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.

The rise in PCE inflation was widely expected: various data points feeding into the figure, including the CPI inflation report, were released earlier in the month. However, this measure remains a focus on Wall Street and in policy circles 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 expect a final rate hike later this year, but not later – perhaps at the November central bank meeting. Even if the Fed does not raise borrowing costs in a few weeks, policymakers will release a new set of economic forecasts that will show whether and how much they expect to raise interest rates by the end of 2023 and into 2024.