The latest data reveals that the cost of goods and services experienced a modest increase of 0.2% in July, while overall inflation remains stubbornly above 3%.
According to economists surveyed by The Wall Street Journal, the personal consumption expenditures index was predicted to advance by 0.2%.
However, the government announced that the increase in prices over the past year has reached 3.3% from the previous 3%. Although inflation has slowed significantly this year, it may take considerable time to return to pre-pandemic levels of 2% or less.
Meanwhile, the core PCE rate of inflation, which excludes volatile food and energy costs, also saw a 0.2% increase last month. This core rate is considered by the Federal Reserve as a more reliable indicator of future inflation trends.
Over the past year, the rate of core inflation marginally rose from 4.1% to 4.2%.
Big Picture
Given the deceleration in the rate of inflation and intermittent indications of a cooling labor market, there is speculation that the Federal Reserve may maintain key U.S. interest rates at their current levels of 5.25% to 5.5%. The Fed is set to convene later this month to determine its next course of action.
The central bank seeks to raise rates sufficiently to control inflation without plunging the economy into a severe recession. Market analysts are currently predicting that the Fed will hold steady in September.
Ultimately, whether the Fed remains on hold indefinitely will depend on the continuation of the steady deceleration in inflation. Additionally, the recent uptick in oil prices and the ongoing rise in wages, surpassing the Federal Reserve’s preferred pace, have added upward pressure on inflation.
Market Reaction
Before the release of this report, both the Dow Jones Industrial Average and S&P 500 were expected to open higher in Thursday trades. The yield on the 10-year Treasury note saw a slight decrease to 4.1%.