Fed’s preferred inflation index matches prior month on annualized basis in July

Investing.com - The inflation metric closely watched by the Federal Reserve rose at the same pace as the prior month in the twelve months to July, likely presenting rate-setters with evidence of sticky price pressures ahead of the central bank’s September meeting. 

The price index of personal consumption expenditures rose by 0.2%, compared to a 0.1% decline in June, data from the Commerce Department’s Bureau of Economic Analysis showed on Wednesday. This yielded an annualized PCE index of 3.7%, in line with the preceding month and faster than forecasts of 3.6%.

Energy prices, in particular, have stayed elevated due to the ongoing conflict in the Middle East, although benchmark oil costs have fallen below the $90-a-barrel level this week on hopes for a diplomatic breakthrough that will reopen shipping traffic in the Strait of Hormuz.

Excluding energy and food, the underlying “core” PCE index for July sped up marginally to 0.2% month-on-month and matched June’s rate of 3.3% year-on-year. Both measures equaled economists’ projections.

“Although many of the PCE numbers were worse than expected, the most important one – YoY Core PCE – held constant and that will give the Fed more time to leave rates on hold,” Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management, told Investing.com.

Wall Street analysts are often equipped with a range of other data points allowing them to estimate the PCE numbers to a relatively high degree of certainty. This can mitigate the market impact of the figures.

Still, the Fed uses the PCE results to calibrate policy. Crucially, the gauge remains well above the central bank’s 2% target, possibly posing a challenge to Fed officials tasked with simultaneously corralling inflation and propping up the labor market. 

In theory, raising rates, as three policymakers on the rate-setting Federal Open Market Committee backed at a meeting last month, can help quell price gains, albeit at the risk of weighing on employment and overall economy. Markets are now pricing in a roughly 60% chance that the Fed will leave rates unaltered at a range of 3.5% to 3.75% next month, but there is about a 40% chance of a quarter-point rate increase, according to CME FedWatch.

“The number of dissenters at the next meeting may grow because the month-over-month readings (headline and core) are getting worse, but we believe enough of the FOMC will want to wait to see more data before making a decision to raise rates next month,” Zaccarelli said.

Fed Chair Kevin Warsh, who is due to deliver a key address at the Fed’s Jackson Hole symposium later this week, has stressed that the the central bank remains committed to tackling inflation, although he has suggested that a recent run-up in government bond yields may have done the work of tightening policy for the Fed. 

The BEA’s report also found that Americans’ personal income increased by 0.4%, up from 0.2% in June and above expectations. Meanwhile, personal spending growth cooled slightly to 0.2% from 0.3%, but was still faster than estimates of 0.1%.