Morgan Stanley

Aug. 29 (UPI) — Inflation rose in July, according to the Personal Income and Outlays report from the Bureau of Economic Analysis, the Fed’s preferred measure.

Core inflation, which excludes food and energy costs, was at a 2.9% seasonally adjusted annual rate, according to the personal consumption expenditures price index. That showed a rise of 0.1% from June and the highest annual rate since February.

The core PCE index increased 0.3% monthly, which is in line with expectations, CNBC reported.

Personal outlays, which is the sum of PCE, personal interest payments, and personal current transfer payments, increased $110.9 billion in July. Personal saving was $985.6 billion in July, and the personal saving rate — personal saving as a percentage of disposable personal income — was 4.4%.

The increase in current-dollar personal income in July primarily reflected an increase in compensation. Personal income increased $112.3 billion, 0.4% at a monthly rate, in July. Disposable personal income — income less personal current taxes — increased $93.9 billion or 0.4%.

Many policy-makers consider core inflation to be a better indicator of trends because it excludes the gas and groceries figures, which are volatile, CNBC said. Central bankers prefer inflation at 2%. Friday’s report shows the economy isn’t near where the Fed wants it.

“The Fed opened the door to rate cuts, but the size of that opening is going to depend on whether labor-market weakness continues to look like a bigger risk than rising inflation,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, to CNBC. “Today’s in-line PCE Price Index will keep the focus on the jobs market. For now, the odds still favor a September cut.”

While the survey of 400 respondents comes amid low unemployment and a growing economy, increasing consumer and business fears over tariffs and a possible recession could hurt spending, warned economists.

“The recent equity market correction was punctuated by the ‘uncertainty shock’ of ever-evolving tariff policy, with investors concerned it could morph into a slowdown or even recession,” Morgan Stanley said in a note Monday.

“What’s really at the heart of the conundrum, however, is that the United States might be at risk for a bout of stagflation, where growth slows and inflation remains sticky.”

Last week, UCLA Anderson School of Management issued its first-ever “recession watch.”

“Be careful what you wish for because, if all your wishes come true, you could very well be the author of a deep recession,” said Clement Bohr, an economist at the business school warned the Trump administration.

“And it may not simply be a standard recession that is being chaperoned into existence, but a stagflation,” Bohr added.

The U.S. Federal Reserve said last week the U.S. economy had made “significant progress toward our goals over the past two years” on inflation and that the economy remains “strong overall.” But the feds held interest rates steady to navigate recession fears.

Federal Reserve Chair Jerome Powell and other officials also lowered their estimate for gross domestic product this year to just a 1.7% annualized gain and raised their core inflation outlook to 2.8%, which is still above the central bank’s 2% inflation target.

That combination of higher inflation and slower growth raises the possibility of stagflation, which was last seen in the 1980s. Still, Powell rebuffed the comparison.

“I wouldn’t say we’re in a situation that’s remotely comparable to that is likely,” he said.