Core U.S. consumer prices rose by a less-than-expected 0.1 percent in July, showing stable prices that held the year-on-year rate of nonfood, nonenergy inflation to 1.9 percent for the second month in a row, the Commerce Department said on Friday.
It doesn't seem like pricing pressures are moving out of control, said George Davis, chief technical strategist at RBC Capital Markets in Toronto.
But personal income and spending rose smartly, sending investors mixed signals about the chances for a Federal Reserve interest rate cut ahead of keenly awaited speech by Fed Chairman Ben Bernanke on Friday.
Analysts polled by Reuters were expecting the core price index to gain 0.2 percent on the month. The June month-on-month core price index gain was revised upward to a 0.2 percent gain from 0.1 percent reported previously.
In the same report, the government said in seasonally adjusted data, personal income rose by a bigger-than-expected 0.5 percent in July, marking the largest month-on-month gain since a 0.8 percent gain in March.
Personal spending rose 0.4 percent in July after an upwardly adjusted 0.2 percent increase for June. Analysts polled by Reuters were expecting both personal income and personal spending to rise 0.3 percent.
Overall prices, as measured by the government's personal consumption expenditures index, also rose 0.1 percent in July after an upwardly revised 0.2 percent gain in June.
July's 1.9 percent rise in the core PCE index, the Federal Reserve's favorite inflation gauge, was the lowest reading since a 1.9 percent rise in March 2004 and was within the Fed's normal comfort range of between one and two percent.
But market reaction to the report was muted ahead of a speech scheduled for 10 a.m. EDT by Bernanke in Jackson Hole, Wyoming on housing and monetary policy.
U.S. government debt prices and the dollar were little changed after the data showed core inflation at slightly lower-than-expected levels in July, while stock futures added to gains.
Robert MacIntosh, chief economist, Eaton Vance Management in Boston, said the spending and income growth signals a resilient economy that may not need a rate cut.
The consumer is still alive and well and inflation is in good shape, he said. The key here is that the set of numbers does not preclude the Fed from cutting rates if they really need to. But I don't think that they need to, exactly because of numbers like this.
In federal funds futures markets, investors have priced in a 25-basis-point cut in the Fed's overnight lending rate for September. But after the data was released, the implied chance of a 50-basis point cut fell to 42 percent against 64 percent late on Thursday.
In the Commerce Department report the personal savings rate rose to 0.7 percent of disposable personal income from 0.5 percent in June.
(Additional reporting by Gertrude Chavez-Dreyfuss in New York)