Aug 26 (Reuters) – The case for a Federal Reserve interest-rate hike gained a little steam on Wednesday after a government report showed inflation in July was a touch stronger than economists had expected.
The 12-month gain in the personal consumption expenditures price index, which the Fed targets at 2%, edged up to 3.7% last month from 3.6% in the month prior, the Commerce Department said. Core PCE inflation, which strips out volatile food and energy and is seen as an indicator of underlying inflation pressures, was 3.3% from a year earlier, no better than it had been in June.
The Fed has held its policy rate steady in the 3.50%-3.75% range since December, and though Fed Chairman Kevin Warsh has vowed to end above-target inflation he has not given any indication about whether he believes it will recede without interest-rate hikes. Wednesday’s data do not show it is, in conflict with earlier reports that did show a slowdown in consumer price inflation over the last couple of months.
“The United States still has an inflation problem,” said Heather Long, chief economist at Navy Federal Credit Union. “The latest data give (Warsh) time to wait and see, but he has to be more clear about what he’s watching closely and what it would take for him to hike rates.”
Fed funds futures prices now reflect about a 44% probability of a September Fed rate hike, versus about 36% immediately before, and show traders are fully convinced that the Fed will have raised the policy rate by the end of the year.
(Reporting by Ann Saphir, Editing by Louise Heavens and Chizu Nomiyama )
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