Summary: US core PCE price index up 0.2% in July, in line with expectations; annual rate ticks up from 4.1% to 4.2%; ANZ: services inflation “sticky”; short-term Treasury yields decline a little; Fed rate-cut expectations for 2024 firm.
One of the US Fed’s favoured measures of inflation is the change in the core personal consumption expenditures (PCE) price index. After hitting the Fed’s target at the time of 2.0% in mid-2018, the annual rate then hovered in a range between 1.8% and 2.0% before it eased back to a range between 1.5% and 1.8% through 2019. It then plummeted below 1.0% in April 2020 before rising back to around 1.5% in the September quarter of that year. It has since increased significantly and still remains above the Fed’s target even after recent declines.
The latest figures have now been published by the Bureau of Economic Analysis as part of the July personal income and expenditures report. Core PCE prices rose by 0.2% over the month, in line with expectations as well as June’s increase. On a 12-month basis, the core PCE inflation rate ticked up from June’s rate of 4.1% to 4.2%.
“The breakdown of the data…confirmed sticky services inflation,” said ANZ senior rate strategist Jack Chambers. “Core services inflation is proving slow to fall and argues in favour of the FOMC holding rates at elevated levels for an extended period.”
US Treasury bond yields declined a little on the day. By the close of business, the 2-year Treasury bond yield had slipped 1bp to 4.87%, the 10-year yield had returned to its starting point at 4.11% while the 30-year yield finished 1bp lower at 4.21%.
In terms of US Fed policy, expectations of a lower federal funds rate in 2024 firmed. At the close of business, contracts implied the effective federal funds rate would average 5.34% in September, slightly above the current spot rate, and then average 5.36% in October. December futures contracts implied a 5.43% average effective federal funds rate while August 2024 contracts implied 4.765%, 56bps less than the current rate.
The core version of PCE strips out energy and food components, which are volatile from month to month, in an attempt to identify the prevailing trend. It is not the only measure of inflation used by the Fed; the Fed also tracks the Consumer Price Index (CPI) and the Producer Price Index (PPI) from the Department of Labor. However, it is the one measure which is most often referred to in FOMC minutes.