Inflation rose slightly in July, according to a measure favored by the Federal Reserve as the central bank prepares to deliver its first interest rate cut in more than four years.
The Commerce Department reported Friday that the personal consumption expenditures price index rose 0.2% during the month and was up 2.5% from a year earlier, exactly in line with the Dow Jones consensus estimate.
Excluding volatile food and energy prices, the core CPI rose 0.2% on the month but was up 2.6% from a year earlier. The 12-month figure was slightly below the consensus estimate of 2.7%.
Fed officials tend to focus more on the core reading as a better gauge of longer-term trends. Both core and headline inflation on a 12-month basis were the same as in June.
Core prices excluding housing, another key Fed measure, rose just 0.1% on a monthly basis. With other components of inflation declining, home prices have proven stubbornly stubborn, rising 0.4% again in July, according to a report Friday.
Elsewhere in the report, the department’s Bureau of Economic Analysis said personal income rose 0.3%, slightly above the 0.2% estimate, while consumer spending rose 0.5%, in line with expectations. Spending continued at a solid pace even as the personal saving rate fell to 2.9%, the lowest since June 2022.
From a component perspective, inflation was little changed over the past month. The Bureau of Economic Analysis reported that prices for goods fell by less than 0.1%, although prices for services rose by 0.2%.
On an annual basis, commodity prices also fell by less than 0.1%, while service prices jumped by 3.7%. Food prices rose by 1.4%, and energy prices accelerated by 1.9%.
Markets did not react much to the news, with stock futures pointing to a slightly higher open on Wall Street and Treasury yields also rising.
The data “suggests a re-establishment of price stability across the U.S. economy,” wrote Joseph Brusuelas, chief economist at RSM.
“The U.S. economy is poised to grow at or above 1.8% in the long run as the Fed begins its rate-cutting campaign, which should put a floor under growth and employment,” he added. “The data supports risk-taking from the business sector as interest rates fall and from investors, who are now looking for a sustained increase in economic expansion.”
The report comes as markets are 100% expecting a September rate cut, with the only uncertainty being whether the Fed will take a gradual step of cutting benchmark rates by a quarter of a percentage point or be more aggressive and move down by half a percentage point.
Following the data release on Friday, the market was pricing in a cut of about a quarter of a percentage point, or 25 basis points, lowering the probability of a move of about 50 basis points to 30.5%, according to the CME Group's FedWatch gauge.
In recent days, policymakers, such as Federal Reserve Chairman Jerome Powell, have expressed confidence that inflation is returning to the Fed's 2% target.
The Fed is now expected to shift its focus from almost exclusively on reducing inflation to supporting the labor market. While the unemployment rate remains low at 4.3%, it has been trending higher over the past year, and surveys show a slowdown in hiring and a perception among workers that jobs are becoming harder to come by.
Attention will now turn to the August nonfarm payrolls report, due in a week, which is expected to show an increase of about 175,000 jobs, according to FactSet.
