PCE price index, a key inflation measure, rose modestly in July

Core inflation met consensus expectations today, with goods prices declining and shelter inflation continuing to moderate, said Zillow Senior Economist Orphe Divounguy.

The personal consumption expenditures (PCE) price index, excluding food and energy, rose 0.2% in July after increasing 0.2% in June, the Commerce Department said Friday. Meanwhile, core PCE — the Federal Reserve’s preferred inflation gauge — also rose 0.2% month-over-month. On a year-to-year basis, the core PCE rose 4.2% in July, up from 4.1% in June and still more than double the Federal Reserve’s target of 2%.

“The 4.2% uptick core PCE index suggested that inflation is still very sticky, despite the mild monthly changes showing some signs of cooling. It might boost the odds of another rate hike in the next FOMC meeting but we will get a much clearer picture after tomorrow’s jobs report,” said Jiayi Xu, economist at Realtor.com.

In July, Fed officials lifted interest rates to a 22-year high, hoping to cool the economy. Chairman Jerome Powell reiterated that the Fed would be watching inflation and other economic readings as the Federal Open Market Committee weighs raising rates again in mid-September. 

Core prices rose at a 2.9% annualized rate over the previous three months. Simultaneously, tighter financial conditions caused the labor market to cool and income growth is slowing. 

However, consumer spending ticked up this summer as the personal savings rate declined, noted Divounguy.

“While rapidly expanding consumer spending could remain a concern for the Federal Reserve, the bigger than expected slowdown in income growth indicates that the spending uptick could be short-lived,” added Divounguy.