July’s Personal Consumption Expenditures (PCE) showed that headline inflation increased 0.2%, while the year-over-year reading rose from 3% to 3.3%. Core PCE, which strips out volatile food and energy prices, also rose by 0.2% in July with the year-over-year reading up from 4.1% to 4.2%.

What’s the bottom line? With the latest PCE data showing an increase in annual inflation, some media analysts suggested that the Fed should continue raising the Fed Funds Rate. This is the overnight borrowing rate for banks and the Fed has been hiking this rate to slow the economy and curb inflation.

However, it’s important to look closely at the data, as inflation is calculated on a rolling 12-month basis. A lower comparison from July 2022 was removed and replaced with the 0.2% reading for this July, causing the annual rate to rise. Inflation has actually made significant progress lower from the 7% peak seen last year and is now less than half that amount at 3.3% on the headline reading.

Plus, if we annualize the last five months’ worth of readings, which provide a more current and relevant trend, inflation is running at a 2.2% pace on headline PCE and 3.2% pace for Core PCE. While this is higher than the Fed’s 2% target, these readings are lower than the annual readings reported for July and show the lower direction inflation has been heading.