A key inflation gauge slowed more than expected in July, giving Fed officials more reason to slow rate hikes.
The personal consumption expenditure price index turned negative, down 0.1% in July from June. Excluding food and energy prices — known as the core PCE and the Fed’s preferred gauge — prices rose at a very slow 0.1%, data released on Friday showed. Analysts had forecast a 0.3% gain for the core index.
The decline was mainly due to lower energy prices, but in part due to consumers pulling back on spending. An inflation-adjusted measure of personal consumption rose just 0.2% in July after rising 0.7% in June.
New data provides further evidence that inflation may have peaked. Another indicator, the consumer price index, did not rise at all in July.
What does a negative PCE mean for the Fed?
Surprisingly, the slowdown in inflation comes at a time when wages are still moving upwards. New data showed that monthly U.S. wages rose 0.8% in July, compared with 0.6% in June. This could suggest that despite the slowdown in some industries, employers are still having to offer higher wages to attract workers.
New inflation data adds to the argument that Fed officials should slow rate hikes in September. In the past two meetings, the Fed has raised rates by 75 basis points each. Previous comments by officials have made it clear that the decision at next month’s meeting will continue this aggressive pace or bring it back to 50 basis points.
Atlanta Fed President Rafael Bostic — whose members set rates for the Federal Reserve’s Federal Open Market Committee (FOMC) — said this week that he is leaning toward a 50 percent rate hike in September basis point.
However, other Fed officials may disagree with Bostic.
“One month of improvement is nowhere near what the committee needs to see before we believe inflation is falling,” Fed Chairman Jerome Powell said at the central bank’s annual meeting in Jackson Hole, Wyoming Speaking at the Monetary Policy Seminar. “We are taking strong and swift steps to moderate demand to better align with supply and keep inflation expectations steady. We will stick to it until we are confident that the job is done.”
