Sticky PCE inflation leaves a divided central bank ahead of Fed’s Jackson Hole retreat
The Federal Reserve’s preferred inflation gauge showed prices remained sticky in July, reinforcing division within the central bank on whether to raise interest rates as policymakers gather this week for their annual economic symposium in Jackson Hole, Wyo.
While prices remained sticky year over year, month-over-month data pointed to a slower pace of increase, a positive signal for those who are content to hold interest rates steady, though it’s unlikely to quiet the hawks.
The Personal Consumption Expenditures (PCE) index rose 3.3% in July on a “core” basis, which excludes volatile food and energy prices. That was in line with expectations and the same level as June. Month over month, prices rose 0.2%, also in line with expectations and up from 0.1% in June.
The monthly increase suggests inflation is rising at a mild rate. New York Fed president John Williams has said that if inflation on a monthly basis, as measured by PCE, comes in at 0.2% or lower, that would indicate inflation is coming back down to the Fed’s 2% target on its own, implying the Fed would not need to raise rates.
Boston Fed president Susan Collins said Tuesday that she was content to hold rates steady at the last meeting, but she would need to see evidence that inflation is dropping to continue holding rates.
Absent that, Collins said it would be appropriate to raise rates “soon” to ensure the Fed gets inflation back down in a reasonable time frame.
Ariane Curtis, senior economist at Capital Economics, predicted that the July reading won’t be enough to push the Fed to hike rates in September.
“But,” she cautioned, “with the annual rate still at 3.3% and given our relatively upbeat forecast for growth and the labor market, it remains a matter of when — not if — rates are raised.”
Curtis sees a quarter percentage point rate hike in December, followed by another early next year.
Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, also didn’t think July’s PCE data would be enough to shift the balance for September’s FOMC meeting. “But if subsequent data point in the same direction, the Fed may feel more pressure to move off the sidelines,” she said.
The key inflation data arrives just before the Fed kicks off its annual gathering in Jackson Hole, where officials are divided on how to set interest rates. Fed Chairman Kevin Warsh will deliver his first speech as the newly installed head of the central bank on Friday. Analysts expect Warsh to steer clear of any hints about what the central bank will do at its September meeting and instead offer a big picture speech.
