Disinflation Stalls In July, Steady Price Growth But Still Too High

What happened: The Personal Consumption Expenditures (PCE) price index rose 0.2% in July after increasing 0.2% in May. Core PCE — the Federal Reserve’s preferred inflation gauge — also rose 0.2% month-over-month. The annual increase in the headline PCE price index rose to 3.3% up from 3.0% in June. The annual increase in Core PCE moved up to 4.2% from 4.1% in June, still more than double the Fed’s 2% target.

What it means: Core inflation met consensus expectations today, with goods prices declining and shelter inflation continuing to moderate. But while housing costs are expected to continue to pull down core inflation, core services – excluding housing – are seeing an uptick. This is in part due to a large increase in consumer spending this summer as the personal savings rate declined. While rapidly expanding consumer spending could remain a concern for the Federal Reserve, the bigger than expected slowdown in income growth indicates that the spending uptick could be short-lived.

Zillow Senior Economist Orphe Divounguy’s perspective: Today’s release was a small bump on the road to the Fed’s 2% target. Core prices advanced at a 2.9% annualized rate over the previous three months. Tighter financial conditions are causing the labor market to cool and income growth is slowing. To that end, some oft-cited economic guideposts indicate monetary policy is in restrictive territory, suggesting that core inflation should continue to fall further towards the Fed’s target.

Continued disinflation would suggest mortgage rates may have already found their peak. However, an uptick in aggregate demand due in part to higher fiscal deficits could keep interest rates – and mortgage rates – higher for longer.

Numbers to know: 

• The Personal Consumption Expenditures (PCE) price index rose 0.2% in July, after rising 0.2% in June. Annual growth in the PCE price index rose to 3.3% in July from 3.0% in June.
• Core PCE – which excludes food and energy – remained also steady at 0.2% for the month. The annual increase in core PCE remains high at 4.2% - up from 4.1% in June, still more than double the Federal Reserve’s target.