The Federal Reserve’s preferred measure of inflation showed an annual gain of 2.5% in July, within striking distance of the central bank’s long-term mandate of 2%, putting the country firmly on track for a series of rate cuts—likely starting next month.
The Personal Consumption Expenditures (PCE) price index increased 0.2% from the previous month, and so-called core-inflation—excluding volatile food and energy prices—rose by the same amount, up 2.6% from a year ago.
Altogether, recent inflation data shows that the Fed’s historically speedy rate-raising campaign has been successful at taming equally historic price increases, which caused significant economic pain for consumers over the last three years. Now, economists will wait and see if it is too late for policymakers to navigate a “soft landing,” and avoid a recession or significant labor market pullbacks after slamming the brakes on the economy.
Harvard economist Jason Furman wrote on X (formerly known as Twitter) that looking over several months of data provides a better picture of inflation, even as this month’s report showed price increases extremely close to the Fed’s target.
“I’ve though(t) underlying inflation is about 2.5% to 3%. Happy to shift to 2.5%. And also with the soft labor market actual inflation should be moving below under (sic) underlying inflation–which is a forecast conditional on neutral labor markets,” he wrote.
Even before this report, the Fed was widely expected to begin cutting rates at its meeting in September. Many economists are now questioning whether the central bank should accelerate its rate cutting plans as the labor market shows signs of buckling after a year and a half of pressure from higher borrowing costs, with all eyes on employment data releasing next week.
Robin Brooks, senior fellow at the Global Economy and Development program at the Brookings Institute, said on X that the latest data shows “the Fed needs to cut hard and fast.”
“Today’s July PCE inflation reading should have alarm bells ringing at the Fed,” Brooks wrote. “Our best tracker of inflation pressure—the combined weight of all PCE items with month-over-month (seasonally adjusted annual rate) inflation less than 2%—fell to 45%, which is below the historical norm.”
Mortgage rates fell sharply after jobs and inflation data this month seemed to cement at least one rate cut in September. It is unclear how quickly or how significantly the Fed’s expected rate cuts will affect real estate, with industry experts mostly expecting a slow return to historic mortgage rate and home sale levels, rather than a huge or sudden shift.
