WASHINGTON — A measure of inflation closely watched by the Federal Reserve remained low last month, continuing a trend of cooling price increases and paving the way for the Fed to cut 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, up slightly from the previous month’s 0.1% increase. 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.
Friday’s report also showed that healthy consumer spending continues to drive the U.S. economy. Americans increased their spending by a robust 0.5% from June to July, up from 0.3% the previous month.
And incomes rose 0.3%, faster than the previous month. But as spending grew faster than income, consumer savings fell, the report said. The savings rate fell to just 2.9%, the lowest level since the early months of the pandemic.
The Fed tends to prefer the inflation indicator the government released on Friday – the Personal Consumption Expenditures Price Index – over the better-known consumer price indexThe PCE index attempts to account for changes in the way people shop as 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 controversial speech last weekFed Chairman Jerome Powell attributed the inflation spike that erupted in 2021 to a “collision” of reduced supply due to pandemic disruptions with a jump in demand as consumers stepped up spending and tapped into savings fueled by federal stimulus checks.
Now that price increases are 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, which now stands 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 forecast for growth in the April-June quarter to a healthy annual rate of 3%, up from 2.8%.