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Muted core inflation data gives Fed 'green light' for September rate cut

Slower-than-expected U.S. inflation could make it easier for Federal Reserve Chair Jerome Powell to cut rates next month if he wants to.

The U.S. core personal consumption expenditure price index, the Fed's preferred inflation gauge, rose 1.6% year over year in July, the Bureau of Economic Analysis said, unchanged from June, but below the 1.7% median economist estimate.

That gives the Fed a "green light" to cut its benchmark interest rate again in September, Tim Quinlan, senior economist at Wells Fargo Securities, wrote in a research note. The tame inflation figures are "enough below" the Fed's 2% goal for the central bank to ease policy again at its Sept. 17-18 meetings, he said.

On a monthly basis, the core PCE price index, which excludes food and energy, grew 0.2% in July, unchanged from the prior month.

The headline PCE price index advanced 1.4% on a yearly basis in July, compared with downwardly revised 1.3% growth recorded in the prior month. On a monthly basis, the index recorded a 0.2% increase against a 0.1% rise in the previous month.

Fed officials listed muted inflation as one reason why they cut rates in July, though a weaker global growth outlook and continued trade uncertainty were two other major factors. But the Fed was divided on whether the rate cut was necessary, with several saying the U.S. economy remained healthy and arguing that inflation was showing signs of strengthening.

Futures markets see a roughly 96% probability that the Fed will lower rates again by 25 basis points next month, and Fed Chairman Powell did little to push back on market pricing when he spoke at Jackson Hole on Aug. 23.

"As long as the market is pricing in a rate cut, we have little doubt that the Fed will deliver, but a larger than 25-basis-point rate cut in September would look reckless against the backdrop of these spending and inflation data," John Ryding, chief economist at RDQ Economics, wrote in a note to clients.

Current-dollar personal income gained 0.1% in July, following an upwardly revised 0.5% growth in June. Personal outlays increased $96.4 billion while personal saving stood at $1.27 trillion in July.

The data comes a day after a downward revision to the country's second quarter GDP growth rate. However, an upward revision to consumer spending to its fastest pace in four years partially offset the impact of the country's trade tensions with China.

With consumer spending soaring, it is "not immediately clear that easier money is terribly needed at the moment," Wells Fargo's Quinlan wrote. "But perhaps, the more accommodative stance might offset any slumping in consumer confidence should the trade war escalate further," he added.

A report today showed that consumer confidence in the U.S. registered the largest monthly fall since December 2012 in August as the level of consumer sentiment was revised down from an initial estimate amid "negative references" to tariffs, according to the latest survey data from the University of Michigan.

The index of consumer sentiment fell to a reading of 89.8 in August, falling short of an earlier estimate of 92.1 and July's reading of 98.4. The consensus estimate of economists polled by Econoday was for an index reading of 92.3 in August.