US inflation remained below Fed target in July

US inflation remained below Fed target in July

The Federal Reserve’s most closely watched measure of US inflation remained under the central bank’s target in July, as it wrestles with whether to cut rates further despite robust consumer spending.

The core personal consumption price index was up 1.6 per cent in July versus the same month last year, as it had been in June, according to the US Department of Commerce. It was up 0.2 per cent from the previous month.

Personal spending adjusted for inflation rose 0.6 per cent in July from June, well over analyst predictions of 0.3 per cent. All types of spending rose, but the trend was particularly apparent in non-durable goods, such as shoes or batteries, which rose 1 per cent in July.

Growth in spending on services, such as meals and haircuts, stayed above 4 per cent on a year-over-year basis. Purchases of both non-durable and durable goods, such as washing machines, dipped sharply at the end of last year but have now recovered.

The Fed aims at a core PCE target of 2 per cent year-on-year growth, a goal it has had difficulty reaching consistently since the global financial crisis. The index has remained below target for all of 2019, even as wage growth accelerated.

Members of the Fed, including chairman Jay Powell, have spoken this year about the difficulty of reaching their inflation target, a problem shared by central bankers in Europe and Japan.

But with a central bank searching for new signals to inform monetary policy, after its single quarter-point cut in the fed funds rate in July, Friday’s data was inconclusive and market reaction was muted.

The policy-sensitive two-year Treasury bill yield was steady at 1.53 per cent. The dollar was largely unchanged.

The 10-year inflation break-even rate, a market measure of inflation expectations derived from inflation protected Treasuries, rose after the data release to 1.59 per cent. Earlier this week, it had sunk to just 1.54 per cent.

According to futures prices compiled by Bloomberg, traders are pricing in a 93 per cent chance the Fed will cut its benchmark interest rate by another 25 basis points at its next meeting in September. The remaining 7 per cent are betting on a more aggressive 50 basis point move.

The core index strips out the prices of food and energy, which tend to be more volatile. Including those items, the PCE index rose 1.4 per cent over the year ending in July, up from 1.3 per cent in June.

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