Fed Likely Undeterred after Preferred Measure of Inflation Falls

“We saw some easing in the July numbers but I think it remains broadbased so there is more work to be done,” - Federal Reserve Bank of Kansas City President Esther George.

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The Federal Reserve’s preferred measure of U.S. inflation surprised on the lower side of economist expectations for July on Friday, echoing the official figures released earlier in August, although Fed officials have indicated that this is not enough to alter the path of U.S. interest rates up ahead.

Inflation measured by the Core Personal Consumption Expenditures (PCE) Price Index came in at just 0.1% for July, down from 0.6% previously and enough to pull the annual rate of price growth down from 4.8% to 4.6%. 

Both numbers surprised on the lower side of expectations to a similar extent as the official inflation data earlier this month after goods prices fell sufficiently to offset a small increase in services prices in the U.S. during July. 

Larger declines were seen in the overall Personal Consumption Expenditures (PCE) Price Index after energy prices fell sharply enough to offset increases in food costs although this index is less influential when it comes to Federal Reserve interest rate policy. 

“We still have high inflation. We saw some easing in the July numbers but I think it remains broadbased so there is more work to be done,” Federal Reserve Bank of Kansas City President Esther George told CNBC’s Steve Leisman on Thursday. 

Kansas Fed President Esther George was one of the latest on Thursday to remind markets that the Fed will likely want to see evidence of a sustained deceleration of inflation coming from many different measures before it would think of moderating its hawkish interest rate stance.

While there were widespread signs of moderating inflation in July, those are yet to be sustained for more than a moment and some policymakers are now arguing that in the meantime the Fed should lift its interest rate at a faster pace than financial markets currently expect for the months ahead.

“I like the idea that you get the rate increases in earlier rather than later. We’ve got inflation right now. We’ve got a strong labour market right now,” St Louis Fed President James Bullard told CNBC on Thursday.

“A good baseline would be that probably inflation will be more persistent than many on Wall Street expect and that’s going to be higher for longer and I think that’s underpriced in markets today,” he added in an interview at the annual Jackson Hole Symposium.

St Louis Fed President James Bullard argued on Thursday that inflation could rise again and remain higher for longer than many imagine while indicating that he could support lifting the Fed Funds rate to its widely expected peak sooner than financial markets have assumed in recent weeks. 

Fed officials voted unanimously for a second consecutive 0.75% increase that lifted the top end of the Fed Funds rate range to 2.5% in July and stuck with guidance given and forecasts made in June when the bank had suggested that interest rates could end the year anywhere between 3% and 3.5%. 

“We need to get to a restrictive stance, which we will do by the end of the year and then we need to see how things turn out. That is we don’t need to go up and then rush way down. We need to go up, sit for a while and let things play out,” said Patrick Harker, Philadelphia Federal Reserve President. 

"I can only speak for myself but I'd like to see us get to above 3.4, that was the median at the SEP, and then maybe sit for a while but if the data says we need to keep increasing, we keep increasing. We've got to get inflation under control. That is job one," Harker said in an interview with CNBC.