The Fed’s preferred measure of inflation edged higher last month, but that figure could be misleading.

The U.S. Bureau of Economic Analysis said the personal consumption expenditures (PCE) price index, which measures what U.S. consumers pay for everything from clothes to medical care, rose to 3.3% in July from 3% in June. report Thursday. Core personal consumption expenditures inflation, which excludes volatile food and energy prices, hit 4.2% last month, compared with 4.1% in June.

However, the increase was caused by the way these year-on-year inflation measures are calculated, rather than a rise in underlying price pressures in July. When making year-to-year measurements, the previous year’s corresponding “base” or comparison period can have a significant impact on the calculation. Last month’s year-over-year inflation figures included a drop in gasoline prices from last summer’s record highs, but this month’s figures did not.

“The main driver of the year-over-year rise is not faster monthly inflation. That was ruled out last July!” Jared Bernstein, chairman of the White House Council of Economic Advisers, explained in a note postal Thursday, X (formerly known as Twitter).

On a month-on-month basis, July PCE and core PCE inflation actually rose only 0.2%, the same as in June. Taken together, this is the smallest sequential increase in PCE inflation since 2020.

Still, experts are divided when it comes to the Fed’s next move and its actions to fight inflation — something that happens often.

to raise or not to raise

Since March 2022, the Federal Reserve’s aggressive interest rate hikes have put pressure on the economy and markets, leading to a raft of recession forecasts from economists and Wall Street titans. But with inflation falling steadily through 2023, many investors now believe the Fed’s rate-hiking cycle is nearing its end.

Lower consumer demand for goods and services will help as high interest rates and student loan repayments resume after a pause during the pandemic, EY-Parthenon chief economist Gregory Daco said Thursday. Lower annual inflation.

Americans were forced to dip into their savings to keep spending even as inflation-adjusted consumer spending rose 0.6% in July after a strong gain in June. The savings rate fell to 3.5% last month, the lowest level since November.

Like Dakota, that means momentum in consumer spending “could fade in the fall,” Morning Consult senior economist Kayla Bruun warned Thursday. This is especially true for spending on non-essential goods and services, from airline tickets to big-ticket items like TVs.

“Data from Morning Consult shows that the recent strength in spending has been concentrated in discretionary categories, which are the easiest to cut from budgets when financial pressures mount. Rising credit card rates, slower wage growth and student loan repayments Factors such as the recovery in the global economy may increasingly impede purchases of these discretionary items, reducing the pace of growth in total spending.”

Weak consumer spending, combined with “subdued” housing inflation and slower wage growth, should lead to a decline in the Fed’s favorite inflation gauge for all of 2023, according to Darko. The economist expects headline PCE inflation to be around 3% by the end of the year, with core PCE inflation in the range of 3.6% to 3.7% — figures that should put the Fed on hold.

“The latest evidence of a slowdown in consumer spending, easing labor market tensions, cooling wage growth momentum, and moderating core inflation reinforces our expectation that the Fed’s tightening cycle is over, even as policymakers continue to prepare for further inflation,” he said. Austerity opens the door.” The “soft landing” claim is now “much more plausible”.

Chris Zaccarelli, chief investment officer at Alliance of Independent Advisors, said he also believed the Fed would likely keep rates on hold at its next meeting in September.

Zaccarelli added: “Not only is the Fed unlikely to raise rates at its next meeting, but they are also unlikely to raise rates again this year as long as inflation remains contained.” Data “cheers”.

Before 2000, the Fed relied on the consumer price index (CPI) to measure inflation, but in 2000 it switched to the PCE price index. three main reasons. First, PCE inflation includes a wider range of goods and services. Second, PCE inflation can be revised as it is reported based on new information. Finally, as consumers’ spending habits change, the weights of the components of the PCE index, from housing to health care, may shift to more clearly reflect true inflation.

Still, not all economists agree that the Fed has tamed inflation. Citi economist Veronica Clarke said in a note on Thursday that the central bank’s progress in fighting inflation has been “slower than expected” in recent months. “Fed officials may still see another rate hike as an effective insurance against upside inflation risks,” she warned.

Quincy Krosby, chief global strategist at LPL Financial, said she was concerned that core inflation would remain “sticky.” While inflation has remained stable this year, Fed officials may need more evidence that prices have stabilized in the long term before wrapping up their rate hike campaign. “The Fed needs a slightly lower number to declare victory,” she said.

For her part, at the Fed’s annual economic symposium in Jackson Hole, Wyoming, last week, Fed Chairman Jerome Powell pledged to “proceed cautiously” with further rate hikes but reiterated his pledge to keep inflation in check.

“Two months of good data are just the start of building confidence that inflation is on a sustained decline to meet our target,” he said. “There’s plenty of further stuff to discuss.”


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