The Federal Reserve’s go-to inflation gauge held at 2.5% in July, Commerce Department data showed Friday. That’s better than anticipated and shows progress — but still underscores the bumpy process for inflation’s descent.
Friday’s report also reaffirmed that the backbone of the US economy — the consumer — is still holding strong. Spending increased 0.5% for the month when Amazon held its annual Prime Day sales event and other large retailers offered competing sales.
The Personal Consumption Expenditures price index, which the Fed uses for its 2% target rate, was 2.5% for the year ended in July, unchanged from June. On a monthly basis, prices increased 0.2% versus 0.1% the prior month.
The latest inflation reading, which served as further confirmation that the pace of price hikes is sustainably cooling, comes just weeks before the Fed is expected to start easing monetary policy and cutting interest rates.
“I thought the report was right down the strike zone,” Mark Zandi, chief economist at Moody’s Analytics, told CNN in an interview Friday. “Bottom line, it indicates that inflation continues to moderate and is within spitting distance of the [Fed’s] target.”
The biggest reason why it’s not yet at 2% is housing services, particularly the implicit cost of homeownership, Zandi said. Rental and housing inflation has cooled substantially in the market but is measured with a lag in PCE and other inflation gauges, such as the Consumer Price Index.
“For all intents and purposes, the Fed has achieved its inflation goals,” Zandi said. “We’re there, and it’s a bright green light for them to start easing interest rates.”
Economists had fully anticipated the index would move higher due to “base effects,” where previous data showed faster-than-usual disinflation. Consensus expectations were for PCE to rise by 0.2% for the month and 2.6% for the year.
The core PCE index, a closely watched measure of underlying inflation that strips out the more volatile components of food and energy, held steady as well by rising 0.2% for the month and 2.6% annually.
This story is developing and will be updated.
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