The Federal Reserve’s Preferred Measure of Inflation Shows Cooling Prices

Key Takeaways

• The Federal Reserve’s preferred measure of inflation showed price increases continued to cool in July, as expected.
• Friday’s Personal Consumption Expenditures report reinforces the expectation that the central bank will cut its benchmark interest rate in September.
• Inflation is likely to become less of a priority for market watchers and central bankers, as the focus shifts to weakness in the labor market.

The Federal Reserve’s preferred measure of inflation showed price growth continued to lose steam, likely reaffirming the central bank’s path ahead on interest rates.

Friday’s release of the Personal Consumption Expenditures (PCE) index showed inflation rose 0.2% over the month of July, just 0.1 percentage point higher than in June. That made the annual inflation rate 2.5%, the same as the previous month and still just above the Fed’s goal of 2%.

The data matched what economists surveyed by Dow Jones Newswires and The Wall Street Journal expected.

“Weakening inflation gives the Fed plenty of room to begin cutting rates, while still resilient household spending is the recipe for a soft landing,” wrote David Alcaly, lead macroeconomic strategist at Lazard Asset Management.

The PCE report was similar to another measure of consumer inflation released earlier this month, the Consumer Price Index. Both reports show a slowly increasing cost of living after a worrisome uptick in the first quarter.

What Does This Mean for the Federal Reserve?

The good news on inflation reinforces the expectation that the Fed will cut its influential federal funds rate at the next policy meeting in mid-September. At this point, inflation data’s influence will likely only help inform the outlook for how fast and far the Federal Reserve will cut its key interest rate fall in the coming months, barring any major re-ignition of price pressures.

“The further cooling of inflation could give the Fed leeway to be more aggressive with rate declines at coming meetings, especially if the labor market shows a steep deterioration,” wrote Nationwide Senior Economist Ben Ayers.

Much of the Fed’s—and, in turn, market watchers’—attention has turned to the labor market, as central bankers monitor weakness for signs of a recession.

Update, Aug. 30, 2024: This article has been updated with additional commentary from economists.

Read the original article on Investopedia.

Conclusion

The latest data on inflation from the Federal Reserve’s preferred measure, the Personal Consumption Expenditures (PCE) index, shows that price growth continued to cool in July. This reinforces the expectation that the central bank will cut its benchmark interest rate in September. With inflation becoming less of a priority for market watchers and central bankers, the focus now shifts to weakness in the labor market as an indicator of a potential recession. The further cooling of inflation gives the Federal Reserve more room to be aggressive with rate declines in the coming months. Overall, this data suggests that the central bank is taking proactive steps to ensure a soft landing for the economy.