The Federal Reserve’s favorite measure to gauge inflation ticked up last month while consumer spending solidly increased — suggesting the economy remained on firmer ground and arguing against a half-percentage-point interest rate cut from the central bank next month.
The personal consumption expenditures (PCE) price index rose 0.2% in July from the previous month, in line with analysts’ forecasts, and increased 2.5% year over year, the Commerce Department reported on Friday.
The “core” PCE — which excludes food and energy prices due to their volatility — rose 2.6%, which was lower than the 2.7% that was predicted.
In June, the PCE index rose by 2.5% year-over-year — down slightly from 2.6% in May.
Two years ago, PCE inflation reached a peak of 7.1%.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.5% last month after advancing by an unrevised 0.3% in June, the report also showed. Economists polled by Reuters had forecast spending would accelerate by 0.5%.
This implies that consumer spending maintained most of the momentum from the second quarter, when it helped to boost gross domestic product growth to a 3.0% annualized rate. The economy grew at a 1.4% pace in the January-March quarter.
There have been concerns over the economy’s health following a jump in the unemployment rate to near a three-year high of 4.3% in July. The fourth straight monthly rise in the jobless rate led financial markets and some economists to put a 50-basis-point rate cut on the table when the Fed embarks on a widely anticipated policy easing in September.
The slowdown in the labor market, mostly driven by a step down in hiring rather than layoffs, has caught the attention of policymakers. Fed Chair Jerome Powell last week said “the time has come for policy to adjust.”
Powell added that his “confidence has grown that inflation is on a sustainable path back to 2%” during his keynote speech at the Fed’s annual economic conference in Jackson Hole, Wyoming.
The Fed chair’s assurance that rate cuts are coming have kept optimism high on Wall Street, where the markets recovered from a rout last month that was triggered by a weaker-than-expected jobs report.
The Dow closed at a record high Thursday, at 41,479, and Dow Futures were in the green before Friday’s opening bell.
Most economists believe the Fed will resist a half-percentage-point rate reduction as the economy continues to hum along and inflation remains above the central bank’s 2% target, though price pressures continue to subside.
The Fed has maintained its policy rate in the current 5.25%-5.50% range for more than a year, having raised it by 525 basis points in 2022 and 2023.
The central bankers hold their next two-day meeting Sept. 17-18.
