Inflation held steady in July on a yearly basis, fresh data release on Friday showed, the latest sign that progress toward cooler price increases remains firmly intact.
The release of the Federal Reserve’s favorite inflation number, the Personal Consumption Expenditures index, showed that yearly inflation was 2.5 percent. That was in line with both the previous month and with economist forecasts.
After stripping out food and fuel prices, both of which jump around, a “core” index was up 2.6 percent from a year earlier. That figure gives economists a clearer grasp on the underlying trend in inflation.
This month, Fed officials and Wall Street analysts are likely to look closely at the monthly inflation numbers. Because inflation climbed slowly last summer, the annual numbers are being measured against cool readings from last year. When comparing July’s prices to June’s, inflation climbed slightly: 0.2 percent in both the headline and the core measures.
The likely takeaway for Fed officials is that inflation continues to gradually moderate — keeping them on track to begin lowering interest rates next month. While the yearly number remains above the Fed’s 2 percent goal, it is down substantially from a peak of more than 7 percent in 2022.
This is the last P.C.E. report the Fed will receive before its Sept. 17-18 policy meeting, although officials will get a Consumer Price Index report on Sept. 11. That inflation measure comes out earlier in the month than the personal consumption measure and feeds into the P.C.E. report.
Given how much progress the Fed has made toward wrestling down inflation, central bankers have signaled that they expect to begin lowering interest rates at their September meeting. The question for investors and economists is whether that move will be a typical quarter-point reduction, or whether it could be a larger half percentage point cut.
How aggressively the Fed cuts rates will probably hinge more on the jobs report than on inflation data, though. Central bankers are likely to closely watch August hiring numbers when they are released next week for any evidence that the job market is cracking, especially after the unemployment rate jumped in July. If conditions are taking a turn for the worse, the Fed might lower rates more quickly to try to cushion the economy and stave off a painful labor market downturn.
“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks,” Jerome H. Powell, the Fed chair, said during a speech last week at Jackson Hole in Wyoming.
He also said that the “time has come” for rate cuts.
The fact that inflation is coming down is good news for incumbent Democrats and their nominee for November’s presidential election, Kamala Harris. Rapid price increases have been bedeviling consumers and chipping away at economic sentiment for more than three years, and the cooling could allow families to feel that they are catching up.
Lower Fed interest rates take time to boost the economy, but they too could be a welcome development for American households.
But given that, the Fed’s moves could draw the ire of Republicans. Donald J. Trump, the Republican nominee, has said or implied that it would be political for the Fed to slash borrowing costs before the election. The central bank is independent of politics, and officials insist that they ignore them entirely and focus on the economy when setting rates.
Mr. Trump has also emphasized that inflation has been rapid under the Biden administration — and that home prices, which are not included directly in inflation, have climbed heftily. As those trends recede, it could diminish the grip of that talking point.