Federal Reserve’s favored inflation gauge shows price pressures easing as rate cuts near

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%.

Quick Read

• The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, shows price pressures easing, with inflation remaining low in July.
• Prices rose 0.2% from June to July, and annual inflation held steady at 2.5%, signaling that inflation is steadily cooling in the U.S.
• Core inflation, which excludes food and energy costs, also remained stable at 2.6% year-over-year, aligning with expectations and reflecting ongoing moderation in price increases.
• The cooling inflation trend paves the way for the Federal Reserve to consider cutting its key interest rate next month for the first time in 4 1/2 years, with economists anticipating a potential quarter-point reduction.
• Despite the easing inflation, many Americans continue to feel the impact of sharply higher prices for essentials like gas, food, and housing compared to pre-pandemic levels.
• Fed Chair Jerome Powell highlighted the significance of the inflation slowdown and indicated that the central bank is now increasingly focused on preventing further deterioration in the job market.
• The Fed’s upcoming interest rate cut is expected to gradually lower borrowing costs for consumers and businesses, including mortgages, auto loans, and credit cards.
• Consumer spending remains robust, contributing to steady economic growth, with the government revising its estimate for Q2 growth to a healthy 3% annual rate.

The Associated Press has the story:

Federal Reserve’s favored inflation gauge shows price pressures easing as rate cuts near

Newslooks- WASHINGTON (AP) —

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%.

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.

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.

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. Consumers are still willing to boost their spending, fueling steady growth in the economy. On Thursday, the government revised its estimate of growth in the April-June quarter to a healthy annual rate of 3%, up from 2.8%.

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