The Federal Reserve’s preferred measure of inflation stayed steady in July keeping the central bank on track to begin lowering interest rates as soon its next meeting in September.
Consumer prices rose 0.2 percent in July and were up 2.6 percent from a year earlier, according to the Personal Consumption Expenditures price index that was released by the commerce department on Friday. That was the same annual pace registered the previous period.
“Core” prices, which exclude volatile food and energy costs and are seen as a more reliable gauge of underlying inflation, rose 0.3 percent from the previous month. Compared with the same time last year, those prices were up 2.9 percent, slightly higher than June’s year-over-year increase.
Are Price Pressures at an Inflection Point?
President Trump’s tariffs have started to push up consumer prices, but what is not yet clear is how much further they are set to rise and whether this will lead to a temporary burst in inflation or something more persistent.
The impact has been most noticeable in products highly exposed to the levies, like furniture, appliances and other household wares as well as recreation goods and footwear. There have been some signs that prices across the services sector have started to firm as well, but that could end up just being a blip.
Many companies have been able to hold off on raising prices for customers because they built up large inventories before the tariffs went into effect. But as those stockpiles dwindle, chief executives have been left with a difficult decision to either absorb the higher costs or pass along those added expenses to their customers.
Are Consumers Still Spending?
How persistent inflation tied to tariffs ends up being depends in large part on consumers’ willingness to keep spending even as prices rise.
One prevailing theory is that companies that opt to charge their customers more may see a sharper pullback in demand for their products as Americans are forced to be more selective about what they buy and when. That could not only limit the extent to which prices for goods and services rise across the country, but also ultimately help to keep a lid on inflation.
If companies whose profit margins have been squeezed by tariffs start to lay off workers, discretionary spending is likely to take an immediate hit.
That has not yet happened, although monthly jobs growth has slowed sharply this summer even as the unemployment rate has stayed relatively stable around 4.2 percent. The slowdown could reflect reduced demand for new hires, but it also could reflect the fact that Mr. Trump’s immigration restrictions have led to a sharp reduction in the size of the labor force.
What Does It All Mean for the Fed?
The latest inflation data is welcome news for the Fed, whose top officials have begun to lay the groundwork for lower borrowing costs as early as their next gathering in roughly three weeks’ time.
Last week, Jerome H. Powell, the chair of the central bank, sent his strongest signal yet that the Fed is preparing to cut interest rates again after a long pause.
Two members of the Fed’s Board of Governors, both of whom were nominated by Mr. Trump, were ready to restart interest rate cuts at the July meeting, citing less concern about inflation and greater worries about the labor market.
One of those officials, Christopher J. Waller, urged his colleagues in a speech on Thursday to “get on with” interest rate cuts. He endorsed a quarter-point reduction at the September meeting and said that he “fully expects” more reductions after that point until the central bank reached a “neutral” setting for policy that neither speeds up growth now slows it down.
He said he could see the central bank moving by a larger increment if the jobs data to be released next Friday “points to a substantially weakening economy and inflation remains well contained.”
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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