The Fed’s Preferred Inflation Gauge Rose Again In July, But Was In Line With Expectations

The Fed's preferred inflation gauge rose 0.2% in July, in line with forecasts from analysts. Concretely, the core personal consumption expenditures price index gained 0.2% last month and clocked in at 3.3% for the year, data from the Department of Commerce showed.

The index that does not exclude more volatile components like food and energy also rose 0.2% and put the annual inflation rate at 3.7%, above analysts' expectations.

Elsewhere, the report showed that personal income rose 0.4% and spending gained 0.2%. Both figures were stronger than previous expectations.

Expectations that the Federal Reserve will hike interest rates in its next meeting climbed after the report. They now stand above 40%, compared to 39.6% on Tuesday and 33.1% last week, according to the CME Group's Fed Watch tool.

The central bank kept rates unchanged in its July meeting, but three officials voted for a hike. The minutes released last week showed that members of the Federal Open Market Committee said they would need to hike rates unless inflation cools over the next months.

"Many participants assessed that policy tightening would likely be necessary if inflation did not decline," reads a passage of the meeting's summary.

"Some participants commented that financial conditions might not currently be sufficiently restrictive to facilitate a return of inflation to 2 percent."

The minutes addressed the vote of the dissenters, who claimed that hiking rates "would likely help forestall the need for a steeper and potentially more costly sequence of tightening moves at a later stage."

Cleveland Federal Reserve president Beth Hammack said earlier this month that more than one interest rate hike could be needed.

Hammack, who among the minority of FOMC voters who supported increasing rates in the July meeting, told Yahoo Finance that "in general, one 25 basis point move probably doesn't do a whole lot for the economy."

"So it's probably some number of [movements]. But I don't want to prejudge what that number is going to be," she added, saying she doesn't "know exactly where we will end."

Minneapolis Fed President Neel Kashkari has also said that action is needed now. He claimed that a "potential series of small policy moves would be better than waiting and eventually concluding that even bolder actions were necessary." The third official who voted for a hike was Dallas Fed Lorie Logan, while the remaining nine favored a hold.

A recent run of softer inflation data combined with signs of a cooling labor market weakened the case for raising interest rates at the Fed's September meeting. But inflation is still above the Fed's target and unemployment too low to make the aggressive rate cuts demanded by President Donald Trump an obvious alternative.