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

An inflation measure closely tracked by the US 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 4½ years.

Prices rose just 0.2 per cent from June to July, the US Commerce Department said Friday, up a tick from the previous month’s 0.1 per cent increase. Compared with a year earlier, inflation was unchanged at 2.5 per cent. That’s just modestly above the Fed’s 2.0 per cent target level.

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 per cent from June to July, the same as in the previous month. Measured from a year earlier, core prices increased 2.6 per cent, 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 per cent in June 2022, the highest in four decades, before steadily dropping.

In a high-profile over a week ago, 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 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 per cent, at the Fed’s next meeting September 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.

INFLATION

“The end of the Fed’s inflation fight is coming into view,” Ben Ayers, senior economist at Nationwide, an insurance and financial services provider, wrote in a research note. “The further cooling of inflation could give the Fed leeway to be more aggressive with rate declines at coming meetings.”

Friday’s report also showed that healthy consumer spending continues to power the US economy. Americans stepped up their spending by a vigorous 0.5 per cent from June to July, up from 0.3 per cent the previous month.

And incomes rose 0.3 per cent, faster than in the previous month. Yet with spending up more than income, consumers’ savings fell, the report said. The savings rate dropped to just 2.9 per cent, the lowest level since the early months of the pandemic.

Ayers said the decline in savings suggests that consumers will have to pull back on spending soon, potentially slowing economic growth in the coming months.

The Fed tends to favour 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 than they do in the index released Friday.

At the same time, the economy is still expanding at a healthy pace. On Thursday, the government revised its estimate of growth in the April-June quarter to an annual rate of 3.0 per cent, up from 2.8 per cent.

AP