The Federal Reserve is poised to consider a reduction in its key interest rate next month, marking the potential end to a four-and-a-half-year pause in monetary easing. This move is driven by recent inflation data, which suggests a cooling in price pressures that has persisted through the summer months.
Data released by the Commerce Department reveals that from June to July, overall prices advanced by a modest 0.2 per cent, a slight uptick from the previous month’s 0.1 per cent increase. The annual inflation rate held steady at 2.5 per cent, marginally above the Fed’s target of 2 per cent. Core inflation, which excludes the more volatile categories of food and energy, also saw a 0.2 per cent rise in July, identical to June’s rate, maintaining an annual increase of 2.6 per cent. Core inflation is often viewed as a more reliable indicator of underlying inflation trends.
Consumer spending, however, showed resilience, growing by 0.4 per cent in July, following a 0.3 per cent increase in June after adjusting for inflation. This robust spending pattern reflects continued economic momentum from the second quarter, which saw the GDP expanding at an annualised rate of 3.0 per cent. Notably, expenditure was higher across both goods and services, with significant increases observed in automobile purchases, insurance, financial services, and recreational activities. The uptick in spending on healthcare, dining out, and hotel stays further underscores consumer confidence.
Conversely, the savings rate dropped to 2.9 per cent in July from 3.1 per cent in June, reaching its lowest level since June 2022. This decline has sparked debate among economists. Some attribute it to potential underreporting of income from undocumented workers, while others worry that households might be depleting savings to sustain their current spending levels, which could jeopardise future consumption. However, some analysts are not concerned, citing strong household balance sheets supported by rising stock and property values.
The personal consumption expenditures (PCE) price index, a key gauge for the Fed, rose by 0.2 per cent in July, following an unrevised 0.1 per cent increase in June. Despite two months of price declines in goods, overall stability was maintained, with increases in takeout food and nondurable goods counterbalancing drops in the cost of durable goods. Service costs, which have risen for the third consecutive month, were driven by higher housing, utilities, and recreational service prices, while transportation services saw a fourth consecutive month of declines and healthcare costs remained unchanged.
Overall, the PCE price index rose by 2.5 per cent over the 12 months ending in July, matching the increase recorded in June. This data, combined with the evolving inflationary trends and consumer behaviour, provides the Federal Reserve with a nuanced backdrop as it considers potential adjustments to interest rates in the coming months.
