Fed-Favored PCE Gauge shows U.S.’s Core Annual Inflation Rate Ticking Higher

MarketWatch

The numbers: The cost of goods and services rose a mild 0.2% in July, but overall inflation crept higher and remained stuck above 3%

Economists polled by The Wall Street Journal had forecast a 0.2% advance in the personal consumption expenditures index.

The increase in prices over the past year, meanwhile, moved up to 3.3% from 3%, the government said Thursday. While inflation has slowed considerably this year, it may take quite some time to return to pre-pandemic levels of 2% or less.

The so-called core PCE rate of inflation also increased 0.2% last month. The core rate omits volatile food and energy costs and is viewed by the Federal Reserve as a better predictor of future inflation trends.

The rate of core inflation over the past year edged up to 4.2% from 4.1% in the prior month.

While there was little in the report that would alarm the Fed, it also didn’t show much progress in moving inflation toward the central bank’s 2% target.

Big picture: A slowing rate of inflation this year and sporadic signs of a cooling labor market could induce the Fed to freeze a key U.S. interest rate at current levels (5.25% to 5.5%). The Fed meets again in September to determine its next move.

The central bank is trying to raise rates high enough to tame inflation without knocking the economy into a sharp recession. Wall Street investors are betting the Fed will stand pat in September and not raise interest rates.

Whether the Fed remains on hold indefinitely will depend on if the steady deceleration in inflation continues.

A recent increase in oil prices has added upward pressure on inflation and wages are still rising faster than the Fed would like.

Looking ahead:  “The PCE report released today revealed no major significant acceleration in inflation, which the Fed will view positively,” said George Mateyo, chief investment officer of Key Private Bank.

“Given the continued strength in the labor market and the fact that the economy is still growing above trend, the Fed will view inflation as cooling but not sufficiently cool,” he added.