Fed’s preferred inflation gauge, latest release unlikely to worry it too much

Core PCE printed at 4.2% y/y, up from the last release of 4.1% y/y, and headline inflation was higher at 3.3% y/y (compared with the previous 3% y/y). The upticks were due to base effects. Although regarded as volatile, the monthly figures for core and headline PCE were flat, and in line with projections at 0.2% m/m. This is annualised to 2.43%.

Given the base effect and the more stable monthly numbers, there was little movement in the US 2-year yield, a gauge for Federal Reserve monetary policy. The CME FedWatch Tool still has the probability that the Fed will pause at its 20 September meeting at 88.5%, with the target range remaining at 525-550 bps.

Although the July headline and core PCE measures were consistent with consensus, they still exceed the Fed's inflation target of 2%. However, if inflation remains under control, reports such as these PCE numbers are unlikely to encourage the Federal Reserve to raise rates again this year.