Inflation Eased in July According to the Fed’s Preferred Measure

August 26, 2022

The Federal Reserve’s preferred inflation gague showed that inflation eased slightly last month as fuel costs continued to fall from record highs.

The Personal Consumption Expenditures (PCE) index showed an annual increase of 6.3% in July, down from the 40-year high of 6.8% in June, according to the Bureau of Economic Analysis. On a month-to-month basis, the PCE price index fell by 0.1%, a marked slowdown from June’s 0.6% monthly increase.

The core PCE index, which strips out volatile categories like food and energy prices, increased 4.6% from a year ago, which is the lowest annual increase since October 2021.

The Fed has traditionally preferred to use the PCE price index over the more commonly cited Consumer Price Index (CPI), because it gives a more complete picture of consumer prices.

While the Fed likely welcomes the lower inflation reading in July, a one-month slowdown in inflation is unlikely to sway the Fed from its current aggressive stance. The PCE price and CPI both showed a slowdown in inflation in July, one that appears to have continued through August, which suggests that we may have seen inflation peak in June.

Federal Reserve Chairman Jerome Powell said in a recent speech that the Fed would continue to hike interest rates and keep them high until it is certain that inflation has been tamed, even if doing so may end up hurting households and businesses.

“Those are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” said Mr. Powell, speaking at the Kansas City Fed’s annual economic symposium in Jackson Hole.

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