Economics
Fed’s favorite inflation indicator increased 0.2% in July, as expected
Inflation edged higher in July, according to a measure favored by the Federal Reserve as the central bank prepares to enact its first interest rate reduction in more than four years.
The Commerce Department reported Friday that the personal consumption expenditures price index rose 0.2% on the month and was up 2.5% from the same period a year ago, exactly in line with the Dow Jones consensus estimates.
Excluding volatile food and energy prices, core PCE also increased 0.2% for the month but was up 2.6% from a year ago. The 12-month figure was slightly softer than the 2.7% estimate.
Fed officials tend to focus more on the core reading as a better gauge of long-run trends. Both core and headline inflation on a 12-month basis were the same as in June.
Core prices less housing increased just 0.1% on the month. As other inflation components ease, shelter has proven to be stubborn, again rising 0.4% in July, according to Friday’s report.
Elsewhere in the report, the department’s Bureau of Economic Analysis said personal income increased 0.3%, slightly higher than the 0.2% estimate, while consumer spending rose 0.5%, in line with the forecast. Spending continued at a solid clip even though the personal savings rate fell to 2.9%, the lowest since June 2022.
From a prices standpoint, inflation changed little over the past month. The BEA said that goods prices fell by less than 0.1% though services increased 0.2%.
On a 12-month basis, goods also were off by less than 0.1%, while services jumped 3.7%. Food prices were up 1.4% and energy accelerated 1.9%.
Markets reacted little to the news, with equity futures pointing to a slightly higher open on Wall Street and Treasury yields higher as well.
The report comes with the markets pricing in a 100% chance of a rate cut in September, with the only uncertainty being whether the Fed will take the incremental step of lowering benchmark rates by a quarter percentage point or being more aggressive and moving a half-point lower.
Following Friday’s release, market pricing tilted a bit more towards a quarter-point, or 25 basis point, reduction, lowering the probability for a 50 basis point move to 30.5%, according to the CME Group’s FedWatch gauge.
In recent days, policymakers such as Chair Jerome Powell have expressed confidence that inflation is progressing back to the Fed’s 2% goal.
The Fed is expected now to switch from a nearly complete focus on bringing down inflation to at least an equal concentration on supporting the labor market. Though the unemployment rate is still low at 4.3%, it has been trending higher over the past year, and surveys suggest a slowdown in hiring and a perception among workers that jobs are getting tougher to come by.
Bank of England Governor Andrew Bailey attends the central bank’s Monetary Policy Report press conference at the Bank of England, in the City of London, on May 8, 2025.
Carlos Jasso | Afp | Getty Images
Bank of England Governor Andrew Bailey told CNBC on Thursday that the U.K. was heading for more economic uncertainty, despite the country being the first to strike a trade agreement with the U.S. under President Donald Trump’s controversial tariff regime.
“The tariff and trade situation has injected more uncertainty into the situation… There’s more uncertainty now than there was in the past,” Bailey told CNBC in an interview.
“A U.K.-U.S. trade agreement is very welcome in that sense, very welcome. But the U.K. is a very open economy,” he continued.
That means that the impact from tariffs on the U.K. economy comes not just from its own trade relationship with Washington, but also from those of the U.S. and the rest of the world, he said.
“I hope that what we’re seeing on the U.K.-U.S. trade side will be the first of many, and it will be repeated by a whole series of trade agreements, but we have to see that happen of course, and where it actually ends up.”
“Because, of course, we are looking at tariff levels that are probably higher than they were beforehand.”
In Bank of England’s Monetary Policy Report released Thursday, the word “uncertainty” was used 41 times across its 97 pages, up from 36 times in February, according to a CNBC tally.
The U.K. central bank cut interest rates by a quarter percentage point on Thursday, taking its key rate to 4.25%. The decision was highly divided among the seven members of its Monetary Policy Committee, with five voting for the 25 basis point cut, two voting to hold rates and two voting to reduce by a larger 50 basis points.
Bailey said that while some analysts had perceived the rate decision as more hawkish than expected — in other words, leaning toward holding rates elevated than slashing them rapidly — he was not surprised by the close vote.
“What it reflects is that there are two sides, there are risks on both sides here,” he told CNBC.
“We could get a much more severe weakness of demand than we were expecting, that could then pass through to a weaker outlook for inflation than we were expecting.”
“There’s a risk on the other side that we could get some combination of more persistence in the inflation effects that are gradually working their way through the system,” such as in wages and energy, while “supply capacity in the economy is weaker,” he said.
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