Feds Go-To Inflation Measure Holds Steady at 3.7 Percent in July

The Federal Reserve’s preferred inflation measure came in higher than expected last month, driven by an acceleration in services prices.July’s personal consumption expenditure (PCE) price index rose 0.2 percent, after the previous month’s decline of 0.1 percent, according to the Department of Commerce’s Bureau of Economic Analysis on Aug. 26.This put the annual inflation rate at 3.7 percent—unchanged from June’s reading.Both readings were 0.1 percent above the consensus estimate.Excluding volatile food and energy prices, core PCE inflation ticked up 0.2 percent monthly. The 12-month rate also held steady at 3.3 percent.Core inflation was in line with economists’ expectations.Monetary policymakers use PCE as an inflation-forecasting tool, placing more weight on it than on the Consumer Price Index. The PCE covers a broad range of goods and services and accounts for real-time consumer substitution.“Although many of the PCE numbers were worse than expected, the most important one – YoY Core PCE – held constant, and that will give the Fed more time to leave rates on hold,” Chris Zaccarelli, CIO at Northlight Asset Management, told The Epoch Times in an emailed note.Goods prices slipped 0.1 percent amid a 2.7 percent drop in gasoline and other energy products. The bureau also reported an almost 1 percent decrease in furnishings and durable household equipment.Conversely, services inflation ticked up 0.3 percent, driven by a more than 1 percent increase in financial services and insurance and a 0.3 percent jump in housing.The Fed monitors services inflation closely because it can signal persistent underlying price pressures that can be challenging to resolve through monetary policy.Looking ahead to the August data, PCE inflation could remain elevated even as global energy markets stabilize, according to forecasts from the Cleveland Fed Inflation Nowcasting model.The 12-month PCE and core PCE inflation rates could hold steady at 3.7 percent and 3.3 percent, respectively. On a monthly basis, they could each rise 0.3 percent.Price pressures could be a factor behind consumers becoming a little more cautious about their consumption habits.Personal spending rose just 0.2 percent in July, down from 0.3 percent in the previous month, the bureau said in a separate report released on Aug. 26. But it came in slightly above the market estimate of 0.1 percent.Advise and DissentWhile investors anticipate the Fed will leave interest rates unchanged at next month’s meeting, Zaccarelli warns that the number of dissenters could grow.“The number of dissenters at the next meeting may grow because the month-over-month readings (headline and core) are getting worse, but we believe enough of the FOMC will want to wait to see more data before making a decision to raise rates next month,” he said.The Fed voted 9–3 in July to leave the benchmark federal funds rate—a key policy rate that influences business and consumer borrowing costs—in the current target range of 3.5 percent to 3.75 percent.The three dissenters—Minneapolis Fed President Neel Kashkari, Cleveland Fed President Beth Hammack, and Dallas Fed President Lorie Logan—supported raising interest rates because inflation is firmly above the 2 percent target.Minutes from July’s meeting suggest that many participants indicated that a rate hike would be warranted if inflation does not cool.On the road to the September Federal Open Market Committee policy meeting, Chairman Kevin Warsh will deliver his first keynote address at this week’s annual Jackson Hole Economic Symposium.“I would say this is one of the more meaningful Jackson Hole gatherings in some time,” Larry Holzenthaler, senior portfolio manager at Catalyst Funds, said in a note emailed to The Epoch Times.In his first series of tests as head of the U.S. central bank, Warsh will be battling with elevated inflation and volatility in the government bond market.The 10- and 30-year Treasury yields have accelerated this month, prompting Treasury Secretary Scott Bessent to bolster his debt buybacks by repurchasing long-dated government bonds and issuing short-term securities.Still, the new Fed chief is unlikely to offer any forward guidance on the path of monetary policy.“He called Jackson Hole a ‘blank piece of paper.’ Investors are going to be anxious to see what’s on the paper,” Holzenthaler added.“Chairman Warsh has indicated that his stance is going to be to communicate a little bit less to the market, but the market was clearly underwhelmed by his last comments.”Warsh is scheduled to deliver his speech at 10 a.m. on Aug. 28.