WASHINGTON — An inflation measure closely tracked by the Federal Reserve remained low last month, extending a trend of cooling price increases that clears the way for the Fed to start cutting its key interest rate next month for the first time in 4 1/2 years.
Prices rose just 0.2% from June to July, the Commerce Department said Friday, up a tick from the previous month’s 0.1% increase. Compared with a year earlier, inflation was unchanged at 2.5%. That’s just modestly above the Fed’s 2% target level.
The slowdown in inflation could upend former President Donald Trump’s efforts to saddle Vice President Kamala Harris with blame for rising prices. Still, despite the near-end of high inflation, many Americans remain unhappy with today’s sharply higher average prices for such necessities as gas, food and housing compared with their pre-pandemic levels.
Excluding volatile food and energy costs, so-called core inflation rose 0.2% from June to July, the same as in the previous month. Measured from a year earlier, core prices increased 2.6%, also unchanged from the previous year. Economists closely watch core prices, which typically provide a better read of future inflation trends.
Friday’s figures underscore that inflation is steadily fading in the United States after three painful years of surging prices hammered many families’ finances. According to the measure reported Friday, inflation peaked at 7.1% in June 2022, the highest in four decades, before steadily dropping.
In a high-profile speech last week, Fed Chair Jerome Powell attributed the inflation surge that erupted in 2021 to a “collision” of reduced supply stemming from the pandemic’s disruptions with a jump in demand as consumers ramped up spending, drawing on savings juiced by federal stimulus checks.
With price increases now cooling, Powell also said last week that “the time has come” to begin lowering the Fed’s key interest rate. Economists expect a cut of at least a quarter-point cut in the rate, now at 5.3%, at the Fed’s next meeting Sept. 17-18. With inflation coming under control, Powell indicated that the central bank is now increasingly focused on preventing any worsening of the job market. The unemployment rate has risen for four straight months.
Reductions in the Fed’s benchmark interest rate should, over time, reduce borrowing costs for a range of consumer and business loans, including mortgages, auto loans and credit cards.
“The end of the Fed’s inflation fight is coming into view,” Ben Ayers, senior economist at Nationwide, an insurance and financial services provider, wrote in a research note. “The further cooling of inflation could give the Fed leeway to be more aggressive with rate declines at coming meetings.”
Friday’s report also showed that healthy consumer spending continues to power the U.S. economy. Americans stepped up their spending by a vigorous 0.5% from June to July, up from 0.3% the previous month.
And incomes rose 0.3%, faster than in the previous month. Yet with spending up more than income, consumers’ savings fell, the report said. The savings rate dropped to just 2.9%, the lowest level since the early months of the pandemic.
Ayers said the decline in savings suggests that consumers will have to pull back on spending soon, potentially slowing economic growth in the coming months.
The Fed tends to favor the inflation gauge that the government issued Friday — the personal consumption expenditures price index — over the better-known consumer price index. The PCE index tries to account for changes in how people shop when inflation jumps. It can capture, for example, when consumers switch from pricier national brands to cheaper store brands.
In general, the PCE index tends to show a lower inflation rate than CPI. In part, that’s because rents, which have been high, carry double the weight in the CPI that they do in the index released Friday.
At the same time, the economy is still expanding at a healthy pace. On Thursday, the government revised its estimate of growth in the April-June quarter to an annual rate of 3%, up from 2.8%.
The Federal Reserve, the central bank of the United States, closely monitors inflation as a key indicator of the health of the economy. One of the measures that the Fed uses to track inflation is the Personal Consumption Expenditures (PCE) price index, which is considered to be the central bank’s preferred measure of inflation.
Recently, the PCE price index has shown signs of decreasing price pressures, indicating that inflation may be slowing down. This comes at a time when the Fed is widely expected to cut interest rates in order to stimulate economic growth and combat potential downturns in the economy.
The PCE price index rose by just 0.1% in May, below the Fed’s target of 2% annual inflation. This marks the third consecutive month of relatively low inflation growth, suggesting that price pressures are not as strong as previously thought.
The slowdown in inflation can be attributed to a number of factors. One key factor is the ongoing trade tensions between the US and China, which have led to uncertainty and volatility in global markets. This has dampened consumer and business confidence, leading to weaker demand and lower prices.
Additionally, falling oil prices have also contributed to lower inflation, as energy costs play a significant role in determining overall price levels. The recent decline in oil prices has helped to offset any potential inflationary pressures in other sectors of the economy.
The Federal Reserve closely monitors inflation data in order to make informed decisions about monetary policy. The recent slowdown in inflation, as indicated by the PCE price index, may give the Fed more room to cut interest rates in the near future. Lower interest rates can help to stimulate borrowing and spending, which in turn can boost economic growth.
However, it is important to note that lower inflation does not necessarily mean that the economy is in trouble. In fact, moderate inflation can be a sign of a healthy and growing economy. The key for the Fed is to strike a balance between promoting growth and keeping inflation in check.
Overall, the decreasing price pressures indicated by the PCE price index suggest that the Fed may have more leeway to cut interest rates in the coming months. This could provide a much-needed boost to the economy and help to mitigate any potential risks of a downturn. As always, the Fed will continue to closely monitor economic data and adjust its policies accordingly to ensure stable and sustainable growth.
