US Fed’s preferred inflation gauge steady as rate cut looms
WASHINGTON and BRUSSELS — The US Federal Reserve’s favored measure of inflation held steady in July according to government data Friday, sustaining expectations that the central bank is on its way to interest rate cuts starting next month.
The personal consumption expenditures (PCE) price index edged up on a monthly basis from 0.1 percent in June to 0.2 percent in July, in line with analysts’ expectations.
But from the same period a year ago, the PCE price index held firm at 2.5 percent, the Department of Commerce said.
Excluding the volatile food and energy segments, PCE inflation was also steady.
“Today’s report shows we are making real progress, with inflation falling to 2.5 percent — continuing at the lowest level in more than three years,” said President Joe Biden in a statement Friday.
These add to signs that the Fed will gradually lower the benchmark lending rate from decades-high levels, starting from its next policy meeting in September.
The central bank had rapidly raised borrowing costs in recent years to tackle soaring inflation.
“Economic fundamentals continue to point to sustainable disinflation,” said EY chief economist Gregory Daco in a recent note.
“Unless labor conditions deteriorate materially in the coming weeks, we continue to expect a majority of policymakers will favor a 25-basis-points cut in September,” Daco added.
Last Aug. 23, Fed chair Jerome Powell said the time had come for the country to begin lowering interest rates, adding his confidence had risen that the battle against inflation was on track.
Meanwhile, Eurozone inflation fell to its lowest level in more than three years this month thanks to falling energy costs, official data showed on Friday, raising expectations of a European Central Bank interest-rate cut.
Consumer price rises slowed to 2.2 percent in August compared to the same month last year after reaching 2.6 percent in July, closing in on the European Central Bank’s two-percent target.
The August rate was the lowest since July 2021 and in line with expectations by analysts for FactSet and Bloomberg.
But core inflation, which strips out volatile energy, food, alcohol and tobacco prices and is a key indicator for the bank, cooled slightly to 2.8 percent in August from 2.9 percent in July, Eurostat said.
Friday’s data will provide some relief after inflation unexpectedly edged up in July.
The ECB launched an aggressive rate-hiking campaign in July 2022 to tame red-hot inflation, which peaked at 10.6 percent in October that year as Russia’s invasion of Ukraine sent food and energy prices soaring.
The ECB cut rates for the first time in June this year.
The Frankfurt-based institution has since kept rates unchanged but the market hopes another cut will come after a meeting on Sept. 12.
The data “makes a rate cut at the European Central Bank’s upcoming September policy meeting more likely”, said Sam Miley of London-based Centre for Economics and Business Research.
“However, the higher rate of core inflation and continually tight labor market will present risk factors to implementing looser monetary policy,” Miley said.
French central bank chief Francois Villeroy de Galhau called for a September rate cut in an interview with French magazine Le Point, saying it would be “fair and wise”.
Villeroy de Galhau is a member of the ECB governing council that decides on rates.
“If we waited until we were actually at two percent to lower rates, we would be acting too late,” he said in comments published on Friday.
