Jay Powell, Federal Reserve chairman, is poised to cut interest rates next week, because the US central bank says it wants to boost sluggish inflation. But parts of Wall Street are not convinced that price growth is really as weak as the Fed claims.

Certainly, the Fed’s preferred measure of inflation, which excludes volatile food and energy, has been flashing a worrisome signal since the turn of the year. The core “personal consumption expenditure index” (PCE) has slowed considerably, having breached the central bank’s 2 per cent target in July last year and hovered near those levels through to December.

Some Fed officials, including Mr Powell, have made much of this softening, using it as one of the main reasons why America needs looser monetary policy.

But according to James Sweeney, chief economist at Credit Suisse, the inflation picture is not as gloomy as headline figures suggest. He notes that core PCE has fallen largely because of weakness in financial services — a category that includes insurance, fund-management costs and fees for using a cash machine.

Financial services has the smallest weighting of the five components among the core PCE index, at 8.5 per cent, but it is the most volatile, notes Mr Sweeney, contributing much of the recent decline. Add to this some robust retail sales figures and a better-than-expected jobs report in June and the conclusion seems clear, he said: the notionally data-dependent Fed does not have the data it needs to justify a rate cut.

colby.smith@ft.com



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