Next week, new data on U.S. inflation is set to drop, and it’s got everyone buzzing. Why? Because it might just be the final nudge the Federal Reserve needs to consider cutting interest rates. Economists are betting on it.
Now, let’s break down what’s really happening. The Fed’s go-to measure for inflation, the personal consumption expenditures price index (excluding the volatile food and energy sectors), is expected to rise by just 0.2% in July. That’s the second month in a row we’re seeing this tiny bump.
If you look at the three-month annualized rate for core inflation, it’s predicted to drop to 2.1%. Not quite at the Fed’s sweet spot of 2%, but damn close. Close enough that some folks are already penciling in those rate cuts.
The coming report isn’t just about inflation, though. There’s also a spotlight on consumer spending, which is expected to rise by 0.5% in July. That might not sound like much, but it’s actually the strongest gain in four months.
Why does this matter? Well, if people are still swiping their credit cards and spending cash, it means the economy isn’t falling apart just yet. And that’s important for the Fed.
They need consumer spending to stay solid to keep the economy growing, especially when they’re trying to steer inflation back to their 2% target without crashing the economy.
Fed Chair Jerome Powell, speaking at the Jackson Hole symposium, said the time might be right to tweak policy. In his own words, he’s “gained confidence” that inflation is heading in the right direction.
Now, there’s a pivot towards considering the risks in the labor market. The Fed’s dual mandate is inflation and employment, remember? With inflation cooling down, the job market is now getting more attention.
So, what’s next for the Fed? Powell gave us a sneak peek at Jackson Hole. He’s got two main goals: keep the U.S. economy from sinking and figure out what went wrong these past few years. Sounds like a tall order, right?
But the Fed’s already gearing up for its first formal review since the pandemic’s inflation spike caught them off guard.
Powell was blunt, admitting that “the limits of our knowledge” were on full display during the pandemic. He stressed the need for humility and a willingness to learn from past mistakes.
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