Source: AFP
The U.S. Federal Reserve’s favored measure of inflation remained steady in July, government data showed on Friday, boosting expectations that the central bank is on track for rate cuts starting next month.
The personal consumption expenditures (PCE) price index rose on a monthly basis from 0.1% in June to 0.2% last month, in line with analysts’ expectations.
However, from the same period a year ago, the PCE price index held steady at 2.5 percent, the Commerce Department said.
Excluding volatile food and energy sectors, PCE inflation was also steady.
“Today’s report shows that we are making real progress, with inflation falling to 2.5 percent — continuing to be the lowest level in more than three years,” President Joe Biden said in a statement.
These add to signs that the Fed will gradually cut its key lending rate from decade-high levels, starting at its next policy meeting in September.
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The central bank had rapidly raised borrowing costs in recent years to counter rising inflation.
“Economic fundamentals continue to point to sustained deflation,” EY chief economist Gregory Dako said in a recent note.
There was increased price sensitivity, easing housing cost inflation and a moderation in wage growth, he added.
“Unless labor conditions deteriorate substantially in the coming weeks, we continue to expect a majority of policymakers to favor a 25 basis point cut in September,” Daco added.
Gradual cuts
In July, goods prices fell by less than 0.1 percent on a monthly basis and prices for services rose 0.2 percent, according to the Commerce Department’s PCE inflation.
Spending rose 0.5% from June to July, more than expected and accelerating from the previous month.
This shows that consumption — which has supported economic growth — continues to hold up as well.
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“The concern is that spending gains are not being matched by income growth,” said Michael Pearce of Oxford Economics.
He noted, however, the strength of household balance sheets despite the lower savings rate.
“With the consumer still strong, recessionary risks do not appear particularly elevated and (this) supports the case for the Federal Reserve to move forward with the rate cut cycle only gradually,” Pearce said.
Last Friday, Fed Chairman Jerome Powell said the time had come for the country to start cutting interest rates, adding that his confidence had grown that the fight against inflation was on track.
But with payrolls figures due next week, Nationwide’s senior economist Ben Ayers warned that “the door is open to bigger cuts if economic conditions weaken more than expected”.
Source: AFP
