Fed will have a keen eye on new inflation data to decide if it should keep raising interest rates

The Federal Reserve consistently says its actions are data dependent.

“Data dependence is, and always has been, at the heart of policymaking at the Federal Reserve,” Fed Chairman Jerome Powell said in a 2019 speech.

But the challenge with data is that it is about the past and the Fed’s actions are focused on trying to shape the economic future.

The consumer inflation rate has more than doubled since the central bank first described price hikes as “transitory.” After anchoring its analysis, it took the agency 11 months of rising inflation rates before it would initially act early this year against inflation by raising its target short-term interest rate.

And inflation continued heating up, partially driven by higher energy prices thanks to Russia’s war in Ukraine — something well beyond the influence of the Federal Reserve.

Once the agency believed the sharp upward trajectory of the inflation data would continue it began hiking interest rates — and by large amounts. Recently, investors have been signaling confidence that inflation will be easing, and the Fed will slow, if not stop and reverse, its policy of raising rates.

Consumer price inflation cooled just a bit in July to 8.5%. That was down from the 9.1% jump in June compared to a year earlier. Confirmation of that data will be in focus this week when the Fed’s favored inflation barometer is released. Personal Consumption Expenditures for July is due out Friday.

The PCE index uses a different methodology than the more familiar Consumer Price Index to measure consumer prices. Still, the Fed and investors will be looking to see if this other price gauge also is backing down from its recent peak.

Lower energy prices have helped slow price hikes so economists, analysts and the Fed will concentrate on the core rate — without food and fuel costs — to get a view of less volatile contributors to inflation.

Wall Street has rebounded under the assumption consumer prices have peaked and the Fed is fast moving closer to ending this cycle of higher interest rates. That assumption, like the Fed’s actions, will depend on the data.

Tom Hudson is a financial journalist and chief content officer at WAMU public radio in Washington, D.C..

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