Inflation remained muted in July and consumer spending growth slowed, a key government report on household expenditures and prices showed Wednesday.
The personal consumption expenditures price index rose 0.2 percent, higher than the 0.1 percent forecast. The index, which is closely watched by the Fed and used for its inflation forecasts and two percent target, is up 3.7 percent, matching the previous month’s year-over-year measure and slightly above the consensus forecast.
Core prices, a measure that excludes food and energy, rose 0.2 percent compared with a month earlier. That was in line with expectations. Compared with a year ago, core prices are up 3.3 percent, matching the forecast and the previous month’s year-over-year increase.
The numbers suggest that underlying inflationary pressures have not increased despite a return to higher oil prices amid ongoing tensions in the Middle East. In June, the PCE price index recorded a decline of 0.1 percent, largely due to declining energy prices. Energy prices in the PCE index fell 1.5 percent, suggesting that higher oil prices may show up in inflation data in August or September.
Consumer spending rose by 0.2 percent, faster than the 0.1 percent expected. Spending on core goods fell 0.8 percent, after adjusting for inflation. Real durable goods purchases dropped 1.4 percent, and nondurable goods spending fell 0.2 percent. Spending on services rose 0.3 percent. Overall spending had been up 0.3 percent in June.
The slowdown in spending and the moderate inflation figures will likely be seen by Fed officials as providing breathing room to hold off on hikes ahead of the midterm election. On Wednesday morning, the fed funds futures market was implying around a 38 percent chance of a hike in September, down from around 40 percent on Tuesday. The odds of more than one hike by year’s end have declined from around 60 percent a month ago to around 28 percent on Wednesday.
Analysts said that Amazon’s decision to hold Prime Day in June rather than July may have pulled spending forward to the start of the summer. Higher-than-expected tax refunds, thanks to the Trump administration’s signature One Big Beautiful Bill, likely boosted spending this spring and early summer, with the effect running out of steam in July.
Median PCE inflation, as calculated by the Cleveland Fed, rose 0.2 percent in July and was up 2.7 percent from a year earlier. Both figures matched the June data, suggesting no acceleration or deceleration in inflation. The Dallas Fed’s measure of underlying inflation, called trimmed mean inflation, rose at an annual pace of 2.2 percent in June. Over the past six months, this measure is up at a 2.3 percent annual pace, matching the 12 month gain.
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