The Fed's preferred inflation gauge is due out on Friday. What to expect?

Federal Reserve officials will get a final look at their favorite inflation gauge on Friday, a snapshot of data that could influence their September interest rate decision even as policymakers appear to be focused elsewhere these days.

At 8:30 a.m. ET, the Commerce Department will release the personal consumption expenditures price index, a sprawling measure of what consumers pay for a variety of goods and services as well as their spending preferences.

While the Fed uses a full panel of indicators to measure inflation, the PCE measure is its preferred data point and sole forecasting tool when members issue their quarterly forecasts. Policymakers focus particularly on the core PCE measure, which excludes food and energy, when making interest rate decisions.

The Fed prefers the personal consumption expenditures index over the Labor Department's Consumer Price Index because the former takes into account changes in consumer behavior such as substitute purchases, and is broader in scope.

For July, the Dow Jones Consensus sees little change in recent trends — 0.2% monthly increases in both headline and core prices, and 2.5% and 2.7% year-over-year gains, respectively. At the core level, the 12-month outlook actually points to a slight increase from June, while the measure of all items remains unchanged.

If the readings come in roughly in line with expectations, they will do little to dissuade Fed officials from moving forward with a long-awaited interest rate cut at their policy meeting scheduled for September 17-18.

“In my view, this will be just another piece of evidence that the Fed is seeing sustained inflation readings at a sustainable pace,” said Beth Ann Bovino, chief economist at U.S. Bank. Any upticks “are really just base-effect type things that won’t change the Fed’s view.”

Fed officials have yet to declare victory over inflation, though recent statements have suggested a more positive outlook. The central bank is targeting an inflation rate of 2% annually.

While PCE readings haven’t dipped below that level since February 2022, Fed Chair Jerome Powell said last week that “my confidence has increased” that inflation is heading back toward target. But Powell also expressed some reservations about the slowing labor market, and the Fed now appears to be shifting away from being an inflation fighter and more focused on supporting the jobs picture.

“Upside risks to inflation have receded, and downside risks to employment have increased,” Powell said.

That view was taken as a signal that policymakers will focus more on preventing a labor market reversal and a broader slowdown in the economy. In turn, that could mean less focus on numbers like Friday’s personal consumption expenditures reading and more on the Sept. 6 report on August nonfarm payrolls.

“The focus at the Fed is going to be on the jobs front. They seem to be more attuned to whether the jobs side is weakening a little bit. I think that's the focus of their monetary policy,” Bovino said.

In addition to Friday's inflation readings, there will also be a look at July personal income, which is expected to rise 0.2%, and consumer spending, which is expected to rise 0.5%.