The Fed’s preferred inflation index shows price increases remained flat in July

The Federal Reserve’s closely watched inflation measure remained flat last month, extending a cooling rate hike that paves the way for the Fed to begin cutting its key interest rate next month for the first time in four and a half years. .

Prices rose 0.2% from June to July, the Commerce Department said on Friday, a marked increase from the previous month’s increase of 0.1%. Compared to last year, inflation was unchanged at 2.5%. That’s just above the Fed’s 2% target rate.

Inflation could derail former President Donald Trump’s efforts to unseat Vice President Kamala Harris on the charge of inflation. Still, despite the end of high inflation, many Americans are unhappy with today’s much higher prices for necessities like gas, food, and housing compared to their pre-pandemic levels.

Excluding variable food and energy costs, so-called core inflation rose 0.2% from June to July, the same as last month. When measured from the previous year, prices increased by 2.6%, which were also unchanged from the previous year. Economists closely monitor prime prices, which often provide a better reading of future trends in the underlying currency.

Friday’s figures underscore that inflation is slowing in the United States after three painful years of rising prices have strained the finances of many families. According to an estimate reported on Friday, inflation rose to 7.1% in June 2022, the highest figure in four decades, before gradually easing.

In a high-profile speech last week, Fed Chairman Jerome Powell said that the rise in inflation in 2021 is a “collision” of supply cuts caused by the disruption of the pandemic and increased demand as consumers increase spending, drawing down savings. with federal stimulus checks.

With rate hikes now cooling, Powell also said last week that “the time has come” to start cutting the Fed’s key interest rates. Economists expect at least a quarter-point cut in the rate, now at 5.3%, at the Fed’s next meeting on September 17-18. With inflation under control, Powell pointed out that the central bank is now more focused on preventing any downturn in the labor market. The unemployment rate has risen for four consecutive months.

Lowering the Fed’s benchmark interest rate should, over time, reduce borrowing costs for a range of consumer and business loans, including mortgages, auto loans, and credit cards.

“The end of the Fed’s inflation war is emerging,” Ben Ayers, chief economist at Nationwide, an insurance and financial services provider, wrote in a research note. “Continued cooling in inflation could give the Fed an opportunity to be more aggressive with rate cuts in future meetings.”

Friday’s report also indicated that healthy consumer spending continues to underpin the US economy. Americans increased their income by 0.5% from June to July, up from 0.3% the previous month.

And revenue rose 0.3%, faster than last month. However, by spending more than their income, consumer savings have declined, the report said. The savings rate fell to just 2.9%, the lowest rate since the early months of the pandemic.

Ayers said the drop in savings suggests that consumers will have to cut back on spending soon, which could slow economic growth in the coming months.

The Fed tends to favor the inflation gauge the government released on Friday—the personal cost price index—over the better-known consumer price index. The PCE index tries to account for changes in the way people buy when inflation jumps. It can capture, for example, when consumers switch from expensive national brands to cheaper stores.

In general, the PCE index tends to show a lower inflation rate than the CPI. In part, that’s because rents, which were higher, weighed twice as much in the CPI than the index released on Friday.

At the same time, the economy is still growing at a healthy pace. On Thursday, the government revised its growth estimate for the April-June quarter to 3% annually, from 2.8%.

– Christopher Rugaber, economics writer for the Associated Press