The Federal Reserve's preferred measure of inflation rose slightly last month and consumer spending also grew robustly, suggesting the economy remains strong and providing a case for the central bank to oppose a half-percentage-point interest rate cut next month.
The Commerce Department said on Friday that the personal consumption expenditures (PCE) price index rose 0.2% in July from the previous month, in line with analysts' expectations, and was up 2.5% from a year earlier.
“Core” PCE, which excludes volatile food and energy prices, rose 2.6%, below the 2.7% expected.
The PCE index rose 2.5% year-on-year in June, down slightly from 2.6% in May.
Two years ago, PCE inflation peaked at 7.1%.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% last month after an unrevised 0.3% increase in June. Economists surveyed by Reuters had expected it to rise 0.5%.
This suggests that consumer spending broadly maintained its momentum from the previous quarter. Second QuarterThat helped boost annual gross domestic product (GDP) growth to 3.0%. The economy grew 1.4% in the first quarter of this year.
Concerns about the health of the economy are growing after the unemployment rate jumped to a three-year high of 4.3% in July. The fourth straight month of increases in the unemployment rate has financial markets and some economists on the table a 50 basis point interest rate cut when the Fed embarks on a widely expected monetary easing program in September.
The labor market slowdown, driven primarily by job losses rather than layoffs, has caught the attention of policymakers. Federal Reserve Chairman Jerome Powell said last week that “it's time to adjust policy.”
“We have increasing confidence that inflation is on a sustainable path toward 2 percent,” Powell added, speaking in a keynote speech at the Fed's annual economic conference in Jackson Hole, Wyoming.
The Fed chairman's promise to cut interest rates boosted optimism on Wall Street, helping the market recover from a sell-off caused by last month's weaker-than-expected jobs report.
The Dow Jones Industrial Average closed at a record high of 41,479 on Thursday, and Dow futures were rising before the open on Friday.
Most economists believe the Fed will resist cutting rates by a half-percentage point because, although price pressures continue to weaken, the economy remains strong and inflation remains above the central bank's 2% target.
The Fed has kept interest rates in the current range of 5.25% to 5.50% for more than a year, before raising them by 525 basis points in 2022 and 2023.
The central bank will hold its next two-day meeting on September 17 and 18.
