Fed’s Preferred Measure of Inflation Reinforces Likelihood of September Rate Cuts

The Federal Reserve’s preferred measure of inflation showed price growth continued to lose steam , likely reaffirming the central bank’s path ahead on interest rates.

Friday’s release of the Personal Consumption Expenditures (PCE) index showed inflation rose 0.2% over the month of July, just 0.1 percentage point higher than in June. That made the annual inflation rate 2.5%, the same as the previous month and still just above the Fed’s goal of 2%.

The data matched what economists surveyed by Dow Jones Newswires and The Wall Street Journal expected.

“Weakening inflation gives the Fed plenty of room to begin cutting rates, while still resilient household spending is the recipe for a soft landing,” wrote David Alcaly, lead macroeconomic strategist at Lazard Asset Management.

The PCE report was similar to another measure of consumer inflation released earlier this month, the Consumer Price Index. Both reports show a slowly increasing cost of living after a worrisome uptick in the first quarter.

What Does This Mean for the Federal Reserve?

The good news on inflation reinforces the expectation that the Fed will cut its influential federal funds rate at the next policy meeting in mid-September. At this point, inflation data’s influence will likely only help inform the outlook for how fast and far the Federal Reserve will cut its key interest rate fall in the coming months, barring any major re-ignition of price pressures.

“The further cooling of inflation could give the Fed leeway to be more aggressive with rate declines at coming meetings, especially if the labor market shows a steep deterioration,” wrote Nationwide Senior Economist Ben Ayers.

Much of the Fed’s—and, in turn, market watchers’—attention has turned to the labor market, as central bankers monitor weakness for signs of a recession.

Update, Aug. 30, 2024: This article has been updated with additional commentary from economists.