July PCE Inflation Report Forecasts Show More Progress Ahead of Expected Fed Rate Cut

Forecasts for the July Personal Consumption Expenditures Price Index report show another month of encouraging inflation data. This will likely give the Federal Reserve even more confidence that price pressures are easing ahead of a long-awaited interest rate cut expected at its upcoming September meeting.

“We’re going to see continued progress on inflation,” says José Torres, senior economist at Interactive Brokers. He attributes this to falling prices for goods, along with crude oil and gasoline.

Economists believe the overall PCE Price Index will rise 0.2% on a monthly basis and 2.6% on an annual basis, according to FactSet’s consensus estimates. They expect the core measure of PCE, which excludes volatile food and energy prices, to rise 0.18% on a monthly basis and 2.7% on an annual basis.

PCE Expected to Reflect Improved Inflation Trend

That data would be slightly hotter than June’s PCE numbers, but inflation continues to trend lower. Analysts at Bank of America anticipate data roughly in line with those consensus estimates and attribute the slight uptick in annual inflation to base effects. Slightly lower PCE inflation at this point last year means the annual rate in July will be higher, even after a relatively small monthly increase.

Overall, “PCE inflation data should increase the Fed’s confidence in the inflation outlook to ease policy in September,” the analysts wrote.

The PCE Price Index is the Fed’s preferred measure of inflation. The central bank’s target is for core inflation to average 2% over time as measured by that index. Analysts say inflation is on its way to this milestone, and Fed Chair Jerome Powell has emphasized that the central bank will not wait to reach it before easing policy.

July PCE Report Highlights

• PCE report release date and time: Friday, Aug. 30 at 8:30 a.m. EDT.
• The PCE Price Index is forecast to rise 0.2% in July after rising 0.08% in June.
• Core PCE is forecast to rise 0.18% in July after rising the same amount in June.
• The PCE Price Index year over year is forecast to rise to 2.6% in July after increasing 2.5% in June.
• Core PCE year over year is forecast to rise 2.7% in July after increasing 2.6% in June.

Smaller Impact from Shelter Costs in PCE Report

Much of the source data for the PCE index is drawn from the Consumer Price Index report. July’s CPI report, released earlier this month, showed falling prices for cars, clothing, and certain labor-intensive services. At the same, shelter costs remained sticky.

Torres expects July’s PCE data to come in lower than July’s CPI data because of differences in how shelter prices are weighted. In July, “CPI was supported by an acceleration in shelter costs, which make up roughly 40% of [the CPI index] but about 22% or 23% of the PCE,” he explains. Overall, he’s anticipating 0.2% PCE growth and 0.1% core PCE growth on a monthly basis in July, slightly less than the consensus estimate.

Will the Fed Cut Rates in September?

After over a year of the Fed holding interest rates at their current range of 5.25%-5.50%, markets are virtually certain it will cut rates at its upcoming meeting. Inflation has eased considerably, and the labor market is cooling. “It is time to start shifting lower,” Torres says.

Bond futures traders see a roughly 35% chance of a 0.50% cut and a roughly 65% chance of a 0.25% cut, according to data from the CME FedWatch tool.

Last week, Powell gave his clearest indication yet that the central bank is prepared to ease policy next month. “The time has come for policy to adjust,” he said in prepared remarks at the Federal Reserve Bank of Kansas City’s Jackson Hole symposium. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

According to Torres, the outstanding question is whether the path of monetary policy in the months ahead will be slow and controlled or a more urgent series of cuts amid a more serious economic slowdown.