US Inflation Stays Sticky, Fed's Warsh Hints at Possible Rate Hikes
A key US inflation gauge remained at 3.7% in July. Fed Chair Warsh signaled potential rate hikes, while consumer confidence dipped and mortgage rates rose.
The past week offered a mixed picture of the American economy, with persistent inflation, shifting Federal Reserve signals, and evolving household sentiment taking center stage.
A key inflation measure watched closely by the Federal Reserve remained elevated in July. The Commerce Department reported that prices rose 3.7% compared to a year earlier, matching June's pace. This figure, from the personal consumption expenditures (PCE) price index, remains well above the Fed's 2% target. Inflation has accelerated since late February, when it stood at 2.9%.
Federal Reserve Chair Kevin Warsh delivered a clear signal on Friday that the central bank may need to act. In his first major speech at the annual Jackson Hole symposium, Warsh acknowledged that recent data shows inflation has cooled somewhat, but stated that underlying trends have not "meaningfully improved." He emphasized the need for confidence that inflation is moving toward the Fed's objective, adding, "Otherwise, we have work to do." While his remarks do not guarantee a rate hike at the next meeting in September, they suggest rates may not be high enough to curb inflation.
Consumer sentiment remains fragile. The Conference Board's consumer confidence index dipped to 89.4 in August, its lowest level in seven months. This decline is partly attributed to ongoing conflict in Iran keeping U.S. gasoline prices above $4 per gallon. While views of the present situation improved, short-term outlooks soured, reflecting frustration after five years of elevated inflation.
The broader economy grew at a sluggish 1.5% annual pace from April through June, a deceleration from the 2.1% pace in the first quarter. The slowdown was largely due to a surge in imports, which subtract from GDP. Imports rose at a 12.5% annual pace, partly fueled by shipments of computer chips and other AI-related products.
In the housing market, mortgage rates ticked higher. The average 30-year fixed-rate mortgage edged up to 6.66%, approaching the year's high of 6.69%. Higher rates continue to add hundreds of dollars to monthly costs and keep potential homebuyers on the sidelines.
Despite these headwinds, the labor market remains resilient. Initial jobless claims fell to 203,000 last week, staying within the historically low range seen over the past year. This suggests layoffs remain rare and most Americans enjoy job security.