Inflation slowed in July as measured by the gauge favored by the Federal Reserve, showing progress in the central bank’s efforts to tighten monetary policy.
The personal consumption expenditures price index increased by 6.3% on an annual basis and actually decreased by 0.1% for the month of July, according to data released by the Bureau of Economic Analysis Thursday morning.
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Core PCE inflation, which strips out energy and food prices, rose at a 4.6% annual rate, below forecast expectations.
Friday morning’s numbers are good news for the economy because it shows that the major interest rate hikes by the Fed are beginning to break through and tame the higher prices.
“Everyone knows gasoline prices have plummeted by over 20% from the peak this year. Still, it is a shock to see deflation staring us in the face,” said Chris Rupkey, chief economist at FWDBONDS.
The easing in inflation, which might have surprised some economists, nearly immediately lowered expectations for rate hikes by the Fed.
Most investors now foresee a half-point hike in September, with the likelihood of such a hike occurring pegged at more than just over 50%, according to CME Group’s FedWatch tool, which calculates the probability using Fed fund futures contract prices.
That is a quick change from just hours before, when more investors were pricing in a hike of 75 basis points. Yesterday the odds of a half-point hike were as low as 36%, showing just how big of an effect Friday morning’s PCE reading has had in convincing the public that inflation has reached its zenith and is now starting to tumble.
While the PCE report is good news for the economy, many are still worried that the U.S. is poised for a recession — or is already in the throes of one.
GDP fell at a 0.6% annualized rate in the second quarter, a revised estimate from the Bureau of Economic Analysis showed Thursday morning.
Republicans have seized on the two consecutive quarters of negative GDP growth and are claiming the economy is now in a recession.
Government officials, economists, and many others use recession designations provided by the National Bureau of Economic Research, a private academic group. The bureau doesn’t provide a concrete definition. Rather, it relies on the judgment of a group of economists.
The group broadly defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
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Still, another factor bolstering the notion that the economy is not recessed is the still-hot labor market.
The economy added a robust 528,000 jobs in July. The unemployment rate also fell to 3.5%, matching the ultralow level it was at prior to the pandemic.
