Dodo Finance: PCE inflation surges in July. Will Federal Reserve consider rate hike?

Consumer prices rose by 3.3% in July compared to the previous year, raising the possibility of the Federal Reserve increasing interest rates once again this year. This increase in prices can be attributed to the slowing of inflation by July 2022, resulting in a larger gap in prices between that month and July 2023. On a monthly basis, prices also rose by 0.2%, in line with the increase seen in June.

Consumer spending also experienced a significant acceleration, which could further maintain upward pressure on prices. Core inflation, which excludes volatile food and energy items, also climbed by 0.2% in July, pushing the annual increase in core prices to 4.2%. Interestingly, the report revealed a greater monthly pickup in inflation when compared to the consumer price index released earlier this month.

In terms of goods and services, the prices of goods such as used cars declined due to resolved pandemic-related supply chain troubles. However, the prices of services, such as healthcare and transportation, experienced a more significant increase in the report. Supercore services, which exclude food, energy, and housing, saw a 0.5% increase in July, further heightening the possibility of another rate hike.

It is worth noting that the Federal Reserve traditionally pays closer attention to the personal consumption expenditures (PCE) index rather than the consumer price index (CPI) when considering inflation. While some experts predict another rate hike in November, others believe that rates could increase again as early as September.

On a separate note, U.S. employers are expected to have added 168,000 jobs in July. Although this represents a slowdown from previous months, the unemployment rate is expected to remain low. Pantheon Macroeconomics predicts that the Federal Reserve will maintain its key rate for the remainder of the year after implementing aggressive rate increases earlier.

Even though household spending surged in July, partly due to Amazon Prime Day sales, incomes rose slightly less than expected. This increase in spending could potentially lead to higher prices, prompting the Federal Reserve to raise interest rates once again this year. Nevertheless, experts anticipate that consumption may slow in the fall as Americans resume student loan repayments and deplete pandemic-related savings.