The inflation indicator that weighs most in the Federal Reserve's analysis remains far from its target. The core PCE increased by 0.2% in July and 3.3% in the last twelve months, the same year-on-year rate recorded in June.
The PCE measures the evolution of prices of goods and services consumed by American households.
It has similarities with the CPI, but uses a different basket and different weights and adapts more quickly to changes in consumer spending patterns.
The Federal Reserve precisely sets its inflation target of 2% using the PCE, not the CPI.
Why the core PCE is so closely watched
The overall indicator includes food and energy, two especially volatile components.
The core PCE excludes them to try to better identify the persistent trend of prices.
The Federal Reserve itself explains that core measures often provide more information than overall inflation about the evolution of prices in the medium term.
In July, it stood at 3.3% year-on-year, still 1.3 points above the central bank's target.
The data does not decide alone on a rate hike or cut
The Fed does not use an automatic rule.
It also analyzes employment, economic growth, wages, inflation expectations, financial conditions, and risks to the system.
This Wednesday, it received a signal of deceleration on the growth side: GDP advanced at an annualized rate of 1.5% in the second quarter, compared to 2.1% in the first.
But a core inflation anchored above 3% limits the margin to quickly relax monetary policy.
How it affects loans
The Fed's decisions and expectations about rates impact the yields on U.S. debt and the rates that banks and markets require to lend money.
This affects mortgages, business financing, consumer credit, and cards, although each product responds differently and with different timelines.
If the market expects high rates for a longer time, new financing operations tend to maintain higher costs.