Inflation ticked up in July, illustrating the opposing forces at play in today’s unusual economy. The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, reported an annual rate of 2.6%, marking a modest rise from previous months. This bump represents a 0.1 percentage point increase over the June rate, a sign that consumer prices continue to yo-yo.
The core PCE index, which excludes volatile food and energy prices, increased by 0.3% month-over-month. This change accelerated core inflation up to 2.9% in July, its highest rate since February. The all-items index had a monthly increase of 0.2%. This shows a poor rebound across the major categories of goods and services.
Looking further into the components, we see energy prices fell by 1.1%. Food prices dropped marginally, down 0.1% from last month. Services prices jumped significantly at 0.3% and goods prices fell by 0.1%. Year-over-year comparisons illustrate further trends: food prices rose by 1.9%, services prices jumped by 3.6%, and goods prices increased by 0.5%.
Consumer spending was much stronger than expected, up 0.5% m/m. This increase could prove influential in guiding economic policy deliberation and inflation projections in the years to come.
Ellen Zentner, chief economist at Morgan Stanley, commented on the implications of the latest data, stating, “The Fed opened the door to rate cuts, but the size of that opening is going to depend on whether labor-market weakness continues to look like a bigger risk than rising inflation.”
“Today’s in-line PCE Price Index will keep the focus on the jobs market. For now, the odds still favor a September cut.”
The recent inflation developments complicate the task ahead for the Federal Reserve as it attempts to walk a tightrope in setting monetary policy. Further increases in core inflation would put worsening upward pressure on interest rates. Consequently, market participants are looking nervously to labor-market indicators and consumer spending patterns to inform their next moves.