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US consumer prices fell in July, another sign inflation has peaked

An employee alters the sale price of merchandise on a numerical sign at a Target store.
Mark Makela
Coming down.
  • Nate DiCamillo
By Nate DiCamillo

Economics reporter based in New York.

Published

A key inflation measure slowed down more than expected in July, giving officials at the US Federal Reserve more reasons to slow down rate hikes.

The personal consumption expenditures price index turned negative, dropping by 0.1% in July vs. June. Excluding food and energy prices—called core PCE and the Fed’s preferred measure—prices rose at a very slow clip of 0.1%, data released Friday show. Analysts had predicted the core index to have risen by 0.3%.

The drop was largely due to falling energy prices, though some of it is also attributable to consumers backing off on spending somewhat. The personal consumption measure—adjusted for inflation—rose by only 0.2% in July, compared to a 0.7% jump in June.

The new data add to other evidence that inflation may have reached its peak. Another measure, the consumer price index, didn’t rise at all in July.

What does negative PCE mean for the Fed?

Surprisingly, the slowdown in inflation comes at a time when wages are still moving up. Monthly US wages rose by 0.8% in July versus 0.6% in June, according to the new data. This may be a sign that despite the slowdown in some industries, employers are still having to offer higher wages to attract workers.

The new inflation data adds to the argument that Fed officials should slow down interest rate hikes in September. In the past two meetings, the Fed raised rates by 75 basis points each. Previous comments from officials have made it clear that the decision at next month’s meeting will be between continuing that aggressive pace or ratcheting it back to 50 basis points.

Atlanta Fed President Raphael Bostic—a member of the Federal Open Market Committee (FOMC) that sets interest rates for the Fed—said this week he’s leaning toward a 50-basis-point hike in September.

Other Fed officials may disagree with Bostic, however.

“A single month’s improvement falls far short of what the committee will need to see before we are confident that inflation is moving down,” said Fed chair Jerome Powell in a speech at the central bank’s annual symposium on monetary policy in Jackson Hole, Wyoming. “We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply and to keep inflation expectations anchored. We will keep at it until we’re confident the job is done.”

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