Key Fed inflation gauge accelerates to 3.3% in July as high prices persist

An inflation measure closely watched by the Federal Reserve ticked higher in July as steep prices continue to squeeze millions of U.S. households. 

The personal consumption expenditures (PCE) index showed that consumer prices rose 0.2% from the previous month, according to the Labor Department. On an annual basis, prices climbed 3.3% – up from 3% the previous month, underscoring the challenge of taming high inflation. 

The figures were both in line with estimates from Refintiv economists.

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Core prices, which strip out the more volatile measurements of food and energy, climbed 0.2% from the previous month and 4.2% from the previous year.

While the Fed is targeting the PCE headline figure as it tries to wrestle consumer prices back to 2%, Chair Jerome Powell previously told reporters that core data is actually a better indicator of inflation. Both the core and headline numbers point to inflation that is still running above the Fed’s preferred 2% target.

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“The PCE index has been moving in the right direction overall, but core inflation remains stickier than expected keeping the data dependent and agile Fed more likely to raise rates again this year,” said Quincy Krosby, chief global strategist for LPL Financial.

Other figures included in the report showed that consumer spending jumped 0.8% in July, compared with a 0.6% increase in June. Still, many economists anticipate that spending will slow in coming months as spenders continue to grapple with expensive goods, high interest rates and the resumption of federal student loan payments.

“Consumers spent freely in July even if it meant dipping into their savings amid slower income growth,” said Gregory Daco, EY chief economist. “We anticipate the trend will slow in August and September as elevated prices for goods and services, higher borrowing costs and moderating income limit consumers’ spending appetite.”

Stocks climbed Thursday morning as the report fueled investor hopes for a rate pause. 

The Fed in July approved another interest rate hike, lifting the benchmark rate to the highest level since 2001. 

Powell signaled last week that additional rate hikes may be on the table this year as policymakers assess whether high inflation has retreated for good. 

“Although inflation has moved down from its peak — a welcome development — it remains too high,” he said. “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”