Key facts
- July's Consumer Price Index report showed core inflation rose 0.2% month-over-month and 2.5% year-over-year.
- The current pace of core inflation is seen as consistent with the Federal Reserve's 2% target.
- A weak jobs report has been released, but does not eliminate the possibility of a September rate hike.
- Federal Reserve officials are divided on whether to raise interest rates at their mid-September meeting.
- The Federal Reserve's preferred inflation gauge is the personal consumption expenditures price index.
New inflation data showing a modest easing of price pressures in July has provided the Federal Reserve with some breathing room as it considers raising interest rates at its policy meeting next month. The latest Consumer Price Index (CPI) report, published by the Bureau of Labor Statistics, indicated that core inflation—which excludes volatile food and energy prices—rose 0.2% from the previous month and 2.5% year-over-year. This pace is seen by some officials as consistent with inflation eventually returning to the central bank's 2% target.
However, the prospect of higher borrowing costs remains on the table, as a segment of Fed policymakers is growing impatient with inflation's sustained overshoot of the target. These officials argue for a faster pace of rate increases to bring inflation down, disagreeing with those who believe price pressures will ease naturally as temporary factors like tariffs and geopolitical tensions fade. The debate over whether to hike rates or not is expected to continue until the Fed's mid-September meeting.
Complicating the Fed's decision-making is the labor market, which has shown signs of losing momentum despite a slight decrease in the unemployment rate. Economists note that people are leaving the labor force and wage growth has been weak. The Fed's next steps are under scrutiny following its recent policy meeting where rates were held steady, with Chairman Kevin Warsh offering mixed signals regarding his commitment to reducing inflation and highlighting tightened financial conditions in the absence of rate hikes.