Fed's preferred inflation gauge eases in July but remains near 40-year high

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Powell to send message Fed will ‘stay the course’ on inflation

Amberwave Partners co-founder and portfolio manager Dan Katz advises not to ‘load up’ on stock leading up to Federal Reserve Chairman Jerome Powell’s speech from Jackson Hole, Wyoming.

The Federal Reserve's preferred inflation gauge moderated slightly in July, but prices remained near a four-decade high, according to new data released on Friday,

The personal consumption expenditures index showed that core prices, which strip out the more volatile measurements of food and energy, climbed just 0.1% from the previous month and rose 4.6% on an annual basis, according to the Commerce Department. Those figures are both lower than the 0.3% monthly increase and 4.7% annual increase forecast by Refinitiv economists.

The more encompassing headline figure rose 6.3% on an annual basis after prices actually fell 0.1% from the previous month.

While the Fed is targeting the PCE headline figure as it tries to wrestle consumer prices back to 2%, Chairman Jerome Powell told reporters last month that core data is actually a better indicator of inflation. 

HOW HOUSING IS FUELING SEARING-HOT INFLATION

"Core inflation is a better predictor of inflation going forward," Powell said. "Headline inflation tends to be volatile." 

The data comes shortly before Powell delivers a speech at the annual central bank gathering in Jackson Hole, Wyoming at 10 a.m. ET. Investors are bracing for Powell to double down on the Fed's hawkish message and pledge to continue hiking rates until inflation cools – dashing Wall Street's hopes for a rate cut next year.

Fed policymakers are moving at the fastest pace in decades to wrestle inflation under control, approving a two consecutive 75 basis point increases, the first since 1994. Officials have suggested that another super-sized hike is possible in September, depending on forthcoming economic data.

The problem is that Fed efforts to cool consumer demand are already starting to slow the economy. The Commerce Department on Thursday released the second estimate of the second-quarter gross domestic product reading, which showed that economic growth shrank 0.6% in the period from April to June. 

Economic output already fell over the first three months of the year, with GDP – the broadest measure of goods and services produced in the U.S. – tumbling 1.6%. That means the economy means the technical definition of a recession, which is considered to be two consecutive quarters of negative economic growth. 

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Experts expect the economy to slow down further in the coming months as the Fed's rate increases continue to push borrowing costs higher.

This is a developing story. Please check back for updates. 

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