Economists hit the nail on the head with the latest U.S. inflation report, reinforcing expectations of a Federal Reserve rate cut in September. The personal consumption expenditures price index rose 2.6% in July on a year-over-year basis, matching a Dow Jones estimate of what economists were expecting. Core PCE, which strips out volatile food and energy prices, rose 2.9% year over year. Stocks have been riding high recently, largely due to expectations that the Federal Reserve will begin another rate-cutting cycle next month. The S & P 500 hit a record on Thursday, closing above 6,500 for the first time. “There is nothing in today’s inflation report to stop the Fed from delivering a rate cut at the September meeting and that has to be a relief for the highly-criticized members of the FOMC,” wrote Chris Rupkey, chief economist at FWDBonds, referring to the policy-setting Federal Open Market Committee. .SPX YTD mountain SPX year to date Traders are pricing in an 87.2% probability of a quarter percentage point rate cut, according to the CME Group’s FedWatch tool. The Fed’s current benchmark rate stands at 4.25% to 4.50%. But Friday’s numbers weren’t perfect. Core PCE, while in line with estimates, marked an acceleration from June — when prices increased 2.8%. “Inflation continues to rise, which may complicate things for the Fed down the road,” Bret Kenwell, U.S. investment analyst at eToro, said in an email. The outlook becomes murkier when looking into October and December. “While the Fed will likely cut rates to accommodate the labor market, it may be hard for them to move as quickly or aggressively as they’d like with inflation moving higher,” Kenwell said. Investors will get new clues on the state of the labor market next week, when the Bureau of Labor Statistics releases the August U.S. jobs report. But for now, Wall Street is breathing a sigh of relief. “You have to love it when a plan comes together. Today’s numbers on both the personal consumption expenditure and income and spending, were right down the middle of the fairway,” said Art Hogan, chief market strategist at B. Riley Wealth.
