US Fed's preferred inflation gauge remains steady

Washington: The US Federal Reserve's favored measure of inflation, the Personal Consumption Expenditures (PCE) price index, held steady in July, according to government data released Friday. This supports expectations that the central bank will begin lowering interest rates at its September policy meeting.

The PCE price index increased by 0.2 percent on a monthly basis in July, matching analysts' forecasts. While the annual rate remained at 2.5 percent, excluding volatile food and energy components, core PCE inflation also remained stable.

These data points reinforce the belief that the Fed is on track to reduce its benchmark lending rate from its current decades-high level. EY chief economist Gregory Daco noted several factors contributing to this, including increased pricing sensitivity, reduced markups, easing shelter cost inflation, moderating wage growth, and strong productivity growth.

"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. EY also anticipates similar cuts in November and December.

The Commerce Department's breakdown of PCE inflation showed that prices for goods decreased slightly while service prices rose. Consumer spending also increased in July, indicating continued strength in the US economy. __AFP Economist Michael Pearce of Oxford Economics cautioned that while the consumer remains strong, there are concerns about the mismatch between spending gains and rising incomes. He noted, however, the resilience of household balance sheets and the reduced risk of a recession.

"With the consumer still strong, the risks of a recession do not appear especially elevated, and supports the case for the Federal Reserve to proceed with its rate-cutting cycle only gradually," Pearce said.

Last Friday, Fed Chair Jerome Powell expressed confidence that the battle against inflation was on track and announced that it was time to begin lowering interest rates.