The Federal Reserve's preferred measure of inflation rose last month, while consumer spending grew solidly — indicating the economy remains on strong ground and arguing against a half-percentage point cut in interest rates by the central bank next month.
The Commerce Department reported Friday that the personal consumption expenditures (PCE) price index rose 0.2% in July from the previous month, in line with analysts' forecasts, and rose 2.5% over the past year.
“Core” PCE – which excludes food and energy prices because of their volatility – rose 2.6%, below the 2.7% forecast.
In June, The PCE index increased by 2.5% year-on-year , Slightly down from 2.6% in May,
Two years ago, PCE inflation peaked at 7.1%.
The report also showed consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% last month after an unrevised 0.3% increase in June. Economists polled by Reuters had forecast spending would rise 0.5%.
This implies that consumer spending maintained most of the momentum. Second quarterWhen it did, it helped boost GDP growth to a 3.0% annual rate. The economy grew at a 1.4% pace in the January-March quarter.
Concerns about the health of the economy have grown after the unemployment rate jumped in July to a near three-year high of 4.3%. The fourth consecutive month of a rise in the jobless rate has led financial markets and some economists to expect a 50 basis point rate cut when the Fed begins its widely anticipated policy easing in September.
The slowdown in the labor market, which is mainly due to a decrease in hiring rather than layoffs, has attracted the attention of policymakers. Fed Chairman Jerome Powell said last week that “it is time to adjust policy.”
Powell said during his keynote address at the Fed's annual economic conference in Jackson Hole, Wyoming, that he has “increased confidence that inflation is on a durable path back to 2%.”
Assurances from the Fed chairman that interest rates will be cut have kept optimism high on Wall Street, where the market has recovered from last month's slide triggered by a weaker-than-expected jobs report.
The Dow closed at a record high of 41,479 on Thursday, and Dow futures were in the green before Friday's opening bell.
Most economists believe the Fed will resist cutting interest rates by half a percentage point, as the economy continues to improve and inflation remains above the central bank's 2% target, although price pressures continue to linger.
The Fed has maintained its policy rate in the current 5.25%-5.50% range for more than a year, and has raised it by up to 525 basis points in 2022 and 2023.
Central bankers will hold their next two-day meeting on September 17-18.
