U.S. Inflation Data Next Week Could Back Rate Cut Bets
Next week, new data on U.S. inflation is set to drop, and itâs 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.Â
Now, letâs break down whatâs really happening. The Fedâs 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. Thatâs the second month in a row weâre seeing this tiny bump.Â
If you look at the three-month annualized rate for core inflation, itâs predicted to drop to 2.1%. Not quite at the Fedâs sweet spot of 2%, but damn close. Close enough that some folks are already penciling in those rate cuts.
The coming report isnât just about inflation, though. Thereâs also a spotlight on consumer spending, which is expected to rise by 0.5% in July. That might not sound like much, but itâs actually the strongest gain in four months.Â
Why does this matter? Well, if people are still swiping their credit cards and spending cash, it means the economy isnât falling apart just yet. And thatâs important for the Fed.Â
They need consumer spending to stay solid to keep the economy growing, especially when theyâre 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, heâs âgained confidenceâ that inflation is heading in the right direction.Â
Now, thereâs a pivot towards considering the risks in the labor market. The Fedâs dual mandate is inflation and employment, remember? With inflation cooling down, the job market is now getting more attention.
So, whatâs next for the Fed? Powell gave us a sneak peek at Jackson Hole. Heâs 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?Â
But the Fedâs already gearing up for its first formal review since the pandemicâs inflation spike caught them off guard.
Powell was blunt, admitting that âthe limits of our knowledgeâ were on full display during the pandemic. He stressed the need for humility and a willingness to learn from past mistakes.