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Fed’s Preferred Inflation Metric Clears Way for September Rate Cut
August 30, 2024
Inflation saw a slight acceleration last month from the month before, according to the Federal Reserve’s preferred inflation gauge, but held steady on an annual basis. Both figures were in line with expectations, and with no major surprises in the latest reading, the Fed is all but certain to cut interest rates at policymakers’ September meeting.
The personal consumption expenditures (PCE) price index rose 0.2% in July from the month before and 2.5% on an annual basis, according to the Commerce Department. Both figures were exactly in line with the expectations of economists polled by Dow Jones.
Excluding the volatile food and energy components, the “core” PCE was also up 0.2% for the month and up 2.6% annually. The annual rate was slightly below economist expectations of 2.7%. Economists tend to prefer “core” inflation readings as a better indicator of long-term trends.
Fed officials prefer to use PCE for their inflation targets rather than the more commonly cited Consumer Price Index (CPI), as PCE seeks to account for changes in consumer habits as prices rise, such as switching brands or substituting products when prices rise. As such, PCE typically runs cooler than CPI.
With the report containing no major surprises, the market is pricing in a 100% chance of a rate cut in September, with the only uncertainty being around its size. Following the release of the report, market pricing tilted toward a smaller 25 basis point cut. The odds a half-percentage point cut stand at 30.5%, according to the CME Group’s FedWatch gauge.
The Commerce Department report also provided showed that consumer spending was up 0.5% for the month. While the data is not adjusted for inflation, the increase in spending far outpaced the rise in inflation.
