Inflation measure closely watched by the Fed rises 2.5% in July

An inflation measure closely watched by the Federal Reserve inched higher in July as elevated prices continue to weigh on millions of Americans.

The Commerce Department reported Friday that the personal consumption expenditures price index rose 0.2% from the previous month. On an annual basis, prices climbed 2.5%. Those figures are mostly in line with expectations.

When excluding food and energy prices, which are more volatile, so-called core prices climbed 0.2% for the month and remain up 2.6% when compared with the same time last year.

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While the Fed is targeting the PCE headline figure as it tries to bring consumer prices back to 2%, policymakers view core data as a better indicator of inflation. Both the core and headline numbers point to inflation that is continuing to cool. 

“Inflation still looks contained, and that’s good news for the economy and for investors looking ahead to lower interest rates,” said Chris Larkin, managing director of trading and investing at E*Trade.

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Other figures included in the report showed that consumer spending rose 0.5% in July compared with a 0.3% increase in June, as Americans continued to open their wallets. Consumer spending has proven surprisingly resilient, despite high prices, steep interest rates and the resumption of federal student loan payments.

The report also showed that personal income rose 0.3% last month, slightly higher than expected.

The data comes as investors look for signs that the Fed is prepared to cut interest rates. Policymakers, including Chair Jerome Powell, have signaled in recent days that they are ready to start adjusting interest rate policy.

“The time has come for policy to adjust,” Powell said last week during a keynote speech in Jackson Hole. “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.”

Investors widely expect the Fed to reduce rates in September amid signs that the economy is weakening and inflation is still easing. In fact, about 30% of traders are actually pricing in an even bigger half-point rate cut next month as concerns grow about the state of the job market.

“The further cooling of inflation could give the Fed leeway to be more aggressive with rate declines at coming meetings, especially if the labor market shows a steep deterioration,” said Ben Ayers, Nationwide senior economist.