Everyday Economics: The Fed’s preferred inflation gauge takes center stage

(The Center Square) – Fed officials are no longer dismissing the possibility of a rate cut before year’s end. In his latest speech, Fed Chair Jerome Powell was quick to point out that second-quarter inflation readings were encouraging, bolstering confidence that inflation is returning to the Fed’s two percent target.

In a speech titled “Getting Closer,” Fed Gov. Christopher Waller highlighted cooling wage growth and a more balanced labor market, while cautioning about the risk that further declines in labor demand could increase unemployment rates to levels not seen in a long time.

Consumers are exhibiting restraint, with retail sales flat in June. Additionally, fresh data on existing home sales and new home sales are expected this week. Home sales are expected to have slumped last month, causing housing inventory to rise further and tempering home price growth.

Despite a 0.5% increase in personal income in May, personal consumption only rose by 0.2%, and the savings rate ticked up to 3.4%, from 3.2% the previous month. Coupled with expectations of a softening labor market, the savings rate is anticipated to continue rising. Easing consumer spending would alleviate pressure on core prices.

The core PCE price index, the Fed's preferred gauge for inflation, is projected to have advanced by just 0.1% in June, bringing the annual increase to 2.5%, down from 2.6% the previous month.

However, while much official data suggests a slowdown, the Producer Price Index (PPI) exceeded expectations in June following a May revision upwards. The PPI, which reflects prices producers can command for their goods and services in the open market, is considered an indicator for future changes in the PCE price index.

Additionally, Dr. Torsten Slok, Apollo’s chief economist, circulated a note last week challenging the consensus among most observers. In “Where is the slowdown?” Slok pointed to strong daily restaurant bookings, robust TSA air travel, high hotel occupancy rates, accelerating loan growth, and increasing Broadway show attendance and rising cinema box office revenues.

Fed fund futures currently indicate traders are pricing in three rate cuts before the end of the year. However, a resurgence in economic activity could slow the pace of disinflation, prevent the Fed from cutting interest rates, and drive Treasury yields higher.