WASHINGTON (AP) — A measure of inflation closely watched by the Federal Reserve remained low last month, continuing a trend of cooling price increases and allowing the Fed to begin cutting its key interest rate next month for the first time in 4 1/2 years.
Prices rose just 0.2% from June to July, the Commerce Department said Friday, a touch higher than the 0.1% increase the previous month. Compared with a year earlier, inflation was unchanged at 2.5%.
The slowdown in inflation could derail former President Donald Trump’s efforts to blame Vice President Kamala Harris for rising prices. Still, despite the near-end of high inflation, many Americans are still unhappy with today’s sharply increased average prices for basic necessities like gas, food and housing compared with their pre-pandemic levels.
Excluding volatile food and energy costs, core inflation rose 0.2% from June to July, unchanged from the previous month. Measured against a year earlier, core prices rose 2.6%, also unchanged from the previous year. Economists closely watch core prices, which tend to provide a better picture of future inflation trends.
Friday’s figures underscore that inflation in the United States is steadily declining after three painful years of rising prices that battered the finances of many families. Inflation peaked at 7.1% in June 2022, the highest in four decades, according to the reading reported Friday.
The Fed is leaning toward the inflation gauge the government released Friday — the personal consumption expenditures price index — over the more familiar consumer price index. The PCE index attempts to capture changes in the way people shop when inflation rises. For example, it can capture when consumers switch from more expensive national brands to cheaper store brands.
Overall, the PCE index shows lower inflation than the CPI. That’s partly because rents, which have been high, have twice the weight in the CPI than in the index released Friday.
In a high-profile speech last week, Fed Chairman Jerome Powell attributed the surge in inflation that erupted in 2021 to a “collision” of reduced supply caused by pandemic disruptions with a jump in demand as consumers stepped up spending and tapped into savings fueled by federal stimulus checks.
With price increases cooling, Powell also said last week that “the time has come” to cut the Fed’s key interest rate. Economists expect at least a quarter-point cut in the rate, now at 5.3%, at the Fed’s next meeting on Sept. 17-18. With inflation under control, Powell indicated that the central bank is increasingly focused on preventing a deterioration in the labor market. The unemployment rate has risen for four straight months.
Cuts in the Fed’s benchmark interest rate should eventually lead to lower borrowing costs for a variety of consumer and business loans, including mortgages, auto loans and credit cards.
Consumers are still willing to increase their spending, which is fueling steady economic growth. On Thursday, the government revised its estimate for growth in the April-June quarter to a healthy annual growth of 3%, up from 2.8%.
