US stocks rose this afternoon following new inflation data that confirmed moderating price pressures, strengthening expectations for an interest rate cut at the Federal Reserve’s September meeting.
The Personal Consumption Expenditure (PCE) index, the Fed’s preferred inflation gauge, increased by 2.5% in July year-over-year, slightly below the economists’ forecast of 2.6%. On a monthly basis, it rose 0.2%, in line with expectations.
The S&P 500 gained 0.7%, the Nasdaq climbed 1%, and the Dow Jones advanced 0.3%.
This PCE report is the final one before the Federal Reserve’s September meeting and follows comments from Fed Chair Jerome Powell last week indicating support for a forthcoming policy adjustment.
The new data highlights that inflation is steadily easing in the US, following a period of significant price increases that severely impacted many households. Inflation peaked at 7.1% in June 2022, the highest in four decades.
In a notable speech last week, Powell attributed the inflation spike that began in 2021 to a “collision” of reduced supply from pandemic disruptions and a surge in demand fueled by increased consumer spending and federal stimulus checks.
With inflation cooling, Powell also stated that “the time has come” to start reducing the Fed’s key interest rate. Economists are anticipating at least a quarter-point cut at the Fed’s meeting on September 17-18.
As inflation moderates, Powell noted that the central bank is now increasingly concerned with preventing further deterioration in the job market, which has seen the unemployment rate rise for four consecutive months.
Isabel Albarran from Close Brothers Asset Management commented:
“Today’s anticipated 0.2% increase in the core US personal consumption expenditure for July reinforces the likelihood of a quarter-point rate cut from the Fed next month and highlights the progress on inflation.”
With the November election approaching, this news is likely to be well-received by Vice President Kamala Harris, as falling inflation and strong employment historically benefit the incumbent party.
Trading volumes are expected to decrease ahead of an extended weekend due to the US public holiday on Monday.
