Inflation moderated slightly in July, according to a price measure favored by the Federal Reserve, the Bureau of Economic Analysis reported on Friday.
The personal consumption expenditures price index fell 0.1% for the month from June, although the core index excluding food and energy rose by the same amount. Year over year, the index rose at a 6.3% rate, down from 6.8% previously. Economists had forecast a 6.4% rate for July.
The annual rate of increase in the core index dropped from 4.8% in June to 4.6%.
“Prices for goods decreased 0.4% and prices for services increased 0.1%,” the bureau said. “Food prices increased 1.3% and energy prices decreased 4.8%.”
The release was eagerly anticipated by economists ahead of a speech by Fed Chairman Jerome Powell at Jackson Hole, Wyoming, where the central bank is holding its annual summer gathering.
Powell has a lot of work to do restoring the Fed’s credibility as last year he introduced the word “transitory” to describe inflation that has proven to be anything but temporary. The year before, he outlined his average inflation targeting policy that has the Fed seeking an annual rate of inflation around 2%.
The Fed has been raising rates to dampen inflation running at an 8.5% clip, as measured by the consumer price index. But some other data on prices has shown some recent moderation in the trend, largely driven by a sharp drop in gasoline and other commodities.
Wall Street has wavered between predictions of a 50 or 75 basis point hike in September at the Fed’s next meeting following two consecutive 75 basis point hikes at its last two meetings.
“The debate heading into this year’s event is about whether Powell will make a dramatic policy “pivot” that would suggest a turn in Fed policy toward pausing the interest rate hiking cycle, or whether he will stick to the plan to continue rate hikes,” a note from J.P. Morgan Private Bank said Thursday.
“Our view is that Powell will likely continue to signal further hikes from here, given the strength in the labor market and elevated inflation,” it added. “At the same time, he will also probably suggest the Fed will think about moving at a less aggressive pace. At the margin, this should help calm volatility across financial markets.strength in the labor market and elevated inflation.”
Consumer spending also increased by 0.1% on a 0.2% rise in personal income, the Bureau of Economic Analysis report said.
“The Fed is most likely past the front-loading stage of the tightening cycle as inflation eases,” said Jeffrey Roach, chief economist at LPL Financial. But the market possibly has it wrong with its expectations of outright rate cuts during the back half of next year. My view is that the Fed will likely hike rates by 50 basis points in September and then will downshift to 25 basis point increments in the following few meetings. After that, the Fed will likely pause, not ease as some might hope.”
The Fed will also have the benefit of Thursday’s second estimate of gross domestic product for the second quarter, which came in better than expected on stronger consumer spending than originally anticipated.
But there are signs that the Fed’s policy is working, with the housing sector noticeably slowing as mortgage rates rise.