US Fed's Preferred Inflation Gauge Rose 2.5% in July, Matching Expectations

Data released by the U.S. Department of Commerce showed that the Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred measure of inflation, rose 2.5% year-on-year in July, matching economists' expectations.

The figures indicated that inflation remains above the Fed's 2% target; however, the steady pace of decline reinforces expectations that the central bank may proceed with cutting interest rates at its upcoming meeting.

A number of economic analysts commented that this data boosts confidence that inflation is on the right path toward the Fed's goal, granting policymakers broader leeway to act.

The U.S. Department of Commerce issues the PCE index monthly, and financial markets attach great importance to it because it directly affects interest rate decisions, which in turn reflect on borrowing costs and investment yields.

What do these terms mean?

PCE Index: A U.S. government measure that tracks price changes in goods and services spent on by consumers; the Fed prefers it over the CPI index because it accounts for shifting spending habits.

Federal Reserve: The central bank of the United States, responsible for monetary policy and setting interest rates.

Interest Rates: The cost paid by borrowers to obtain money; central banks raise them to curb inflation and lower them to stimulate the economy.