The Personal Consumption Expenditures (PCE) report for July showed inflation rising 2.5%, in line with expectations.
The inflation rate for July remained unchanged at 2.5%, according to the Personal Consumption Expenditures report, which came out Friday morning.
This marks the first time in four months that the Federal Reserve’s preferred inflation gauge has not declined.
The 2.5% rate was in line with analysts’ expectations for the month. Stocks were up on Friday morning on the PCE report, led by the Nasdaq, up about 1%.
Core PCE falls
Core PCE, which excludes more volatile food and energy costs, was at 2.6% in July, which was also the same as last month. However, it was below estimates of 2.7%.
Looking at the prices of goods and services, goods were flat in July with no gain in price, however, services inflation was 3.7%, down from 3.8% the previous month. Combined, the rate was 2.5%.
Further, food prices were up 1.4%, same as June, while energy goods and services rose 1.9%, slightly lower than 2% in June.
On a monthly basis, inflation rose 0.2% for both the PCE and core PCE. Both were in line with economists’ expectations. However, the 0.2% PCE increase was up from 0.1% in June, and core PCE of 0.2% was the same as June.
The real PCE, which gauges the prices of goods and services adjusted for inflation, rose 0.4% in July, up from 0.3% in June.
The real PCE reflected an increase of 0.7% in spending on goods and an increase of 0.2% in spending on services. Within goods, the largest contributor to the increase was motor vehicles and parts, while the largest contributor to services was health care
The PCE report also revealed a 0.3% increase in personal income in July to $75.1 billion, while disposable personal income also increased 0.3% for the month to $54.8 billion. Both of these numbers were up from a 0.2% increase in June and higher than the estimates that called for a 0.2% increase in July.
However, the personal savings rate dropped to 2.9%, from 2.1% in June. The savings rate is now the lowest it has been since 2022.
Economists say PCE report should not alter the Fed’s course
While the overall PCE rate did not drop, economists maintain that the Federal Reserve should remain on track to cut interest rates at its September meeting.
“There is nothing in the inflation data that would stop the Fed from cutting by 50bp at its September meeting,” Harvard professor and former Obama Administration economist Jason Furman posted on Twitter.
Former St. Louis fed President James Bullard, now the Dean at Purdue University’s Daniels School of Business, told CNBC Friday that this was a good report.
“This will put the Fed squarely on a rate cut in September and I think it will be 25 basis points,” Bullard said on CNBC.
Bullard also expects 25 basis point rate cuts in November and December as well.
“It is a soft landing, and it has been achieved,” Bullard added. “I think Jay Powell’s speech at Jackson Hole was essentially recapping the success of monetary policy over the past two years.”
Joe Davis, global chief economist at Vanguard, concurred.
“We do not expect the July PCE report will affect the trajectory of anticipated rate cuts by the Fed in September and December,” Davis said. “Chair Powell has signaled an increasing focus on labor market conditions as the impetus for near-term policy. With goods prices under control, services prices should continue to moderate through the end of this year as the labor market comes into better balance.”
The Fed’s next meeting is September 10 and 11.
