Overall P.C.E. Inflation Ticked Up in July

The Federal Reserve has warned for months that wrestling rapid inflation back to a normal pace was likely to be a bumpy process, a reality underscored by fresh data on Thursday that showed a closely watched inflation gauge picking back up in July.

The report also made clear that consumers are still opening their wallets for a range of goods and services, from restaurant meals to medicine and pet-related products, in a sign of momentum that could keep central bankers on watch. If Americans remain willing to pay up to buy products that they both need and want, it could allow companies to keep charging more, making it more difficult to fully stamp out inflation.

The Personal Consumption Expenditures price index — the Fed’s preferred measure of inflation — climbed 3.3 percent in July from the previous year, up from 3 percent in the last report. While that is down from a peak last summer of 7 percent, it is still well above the 2 percent growth rate that the Fed targets.

Central bankers tend to more closely monitor a measure of core inflation that strips out volatile food and fuel prices to give a clearer sense of the underlying price trend. That measure also climbed, coming in at 4.2 percent after 4.1 percent in June.

Inflation is expected to slow later this year and into 2024 — and there are encouraging signs under the surface that it is in the process of coming down — meaning Thursday’s report likely marks a bump in the road rather than a reversal of recent progress toward cooler prices. But as inflation figures bounce around, Fed officials have been hesitant to declare victory.

“In the details, you could find reasons not to be concerned,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. But she thought that the Fed would likely take a view similar to hers on the overall message: “I’m still concerned that the core is sticky.”

That wariness has only been reinforced by the economy’s surprising momentum after a year and half in which Fed policymakers have ratcheted up interest rates. The Fed’s policy rate is now set at 5.25 to 5.5 percent, up from near-zero in March 2022, which is making it more expensive to borrow to buy a house or car or to expand a business.

Despite that, the job market has remained strong. An employment report set for release on Friday is expected to show that while businesses added fewer jobs in August, the unemployment rate remained very low at 3.5 percent. Solid employment rates and decent wage growth are helping people to continue to spend money: The fresh consumption data released Thursday showed that personal spending climbed by 0.8 percent in July from the month before, more than economists expected and a solid pace.

Even after adjusting for inflation, it was up 0.6 percent, a pop from 0.4 percent in the previous report.

“In totality, it suggests that real growth is quite firm,” said Neil Dutta, head of economic research at Renaissance Macro, which he said should keep the Fed wary in the months ahead. At the same time, the report contained good news: “The momentum in inflation seems to be downshifting somewhat, which is encouraging.”

While the year-over-year inflation rate — the 3.3 percent figure — moved slightly higher in July, analysts like Mr. Dutta closely watch month-to-month price increases. Those have been more contained in recent months.

The tick higher in annual P.C.E. inflation was widely expected. Various data points that feed into the number, including the Consumer Price Index inflation report, come out earlier in the month. The measure remains a point of focus on Wall Street and in policy circles despite its late release because it is the one that the Fed uses to define its official inflation goal.

Fed officials will be watching data over the next few weeks as they consider what to do with interest rates at their meeting on Sept. 20. Policymakers have said that the meeting is a “live” one, meaning that they could either lift interest rates or keep them on hold, but several have suggested that at this point they feel that they can be patient in making a move.

“Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks,” Jerome H. Powell, the Fed chair, said in a high-profile speech last week.

Many investors do think a final rate increase is possible later this year, but later on — perhaps at the central bank’s November gathering.

And even if the Fed does not lift borrowing costs in a few weeks, policymakers will release a fresh set of economic projections that will show both whether they still expect to nudge rates higher this year, and by how much they expect inflation to slow both by the end of 2023 and into 2024.

Given that, Wall Street will closely parse a few incoming data points, including a jobs report set for release Friday and a Consumer Price Index inflation report on Sept. 13, to try to guess what the Fed will signal.

“The employment data tomorrow will be very important,” Ms. Uruci said. She noted that she’ll be looking for further signs that the job market is slowing to a normal level of strength, which could make it more likely that inflation will slow without a big economic slump, in what is sometimes called “immaculate disinflation.” But she’s not sure if such a benign outcome is possible.

“It feels too good to be true,” she said.

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