Measuring inflation is tricky and quite controversial especially as the government is best able to measure it given the complexity of the task, but they also have an incentive to downplay it. This is because inflation is politically damaging and fighting higher inflation means less economic activity.

One of the Federal Reserve's major tasks is to maintain price stability. The Fed tends to focus less on the CPI and more on the PCE (personal consumption expenditures) and trimmed mean which eliminates outliers in both directions. Thus, these data releases have taken on greater importance given that tighter monetary policy is one of the biggest headwinds for stocks. And, it's expected that a 'Fed pivot' would likely mark a bottom for the stock market.

July's PCE data showed that U.S. consumer spending was basically flat due to lower gasoline prices. Initially, stocks were higher after the report as falling inflation marginally increased the odds of a 50 basis point hike vs a 75 basis point hike. Of course, these odds shifted again in the opposite direction as FOMC Chair Jerome Powell issued a very hawkish speech at the Jackson Hole monetary policy conference.

One positive from the drop in inflation is that wage growth is once again positive on a real and nominal basis. In July, consumer spending was up 0.1% compared to a 1% increase in June. It was also below expectations of 0.4% with many expecting a negative print in the next month.

Overall, the core PCE was down 0.1% which is the first negative print since April 2020 and a big reversal from June's 1% increase. On an annual basis, PCE was up 6.3%, a decline from last month's 6.8%.

Another inflation report was released on Friday as well, the University of Michigan consumer sentiment survey, which showed inflation expectations continuing to fall. The Fed is worried that inflation expectations become embedded, so far this isn't the case. Instead, inflation expectations are now in-line with Treasuries and TIPS which continue to treat the current inflation bump as transitory.