Inflation Eased in July, According to the Fed’s Preferred Measure

The so-called core PCE index—which excludes volatile food and energy prices—increased 4.6% in July from a year ago, down from 4.8% in the year through June. On a monthly basis, core prices rose a seasonally adjusted 0.1%, slowing markedly from June’s 0.6% pace.

Elevated inflation is the result of rapid growth as the U.S. bounced back from the Covid-19 pandemic, fueled in part by increased demand from lower interest rates and government stimulus that collided with constrained supply chains. The Fed faces the tough challenge of tightening monetary policy to cool the hot labor market and slow demand enough to curb inflation without driving up mass layoffs.

“We’re heading in the right direction—inflation is coming down. But we’re a long way off target and we think it’s going to be a while—multiple years—before we’re back to target,” said Andrew Schneider, U.S. economist at BNP Paribas, referring to the Fed’s 2% inflation goal, measured by the PCE price index.

“What that’s telling us—and this is something the Fed is increasingly saying—is that the Fed is going to have a pretty high bar to start cutting rates, particularly next year,” he said.

Federal Reserve Chairman Jerome Powell said in a speech Friday that the Fed must continue to lift interest rates and keep them high until it is certain that inflation has been tamed, though doing so also may hurt households and businesses.

“Those are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” said Mr. Powell, speaking at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyo.

Fed officials on July 27 lifted the benchmark federal-funds rate by 0.75 point, the fourth consecutive rise since March. The move brought the rate to a range between 2.25% and 2.5%. Fed officials are likely to raise rates by half a percentage point or 0.75 point at their next meeting in September.

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