Janet Yellen

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Core inflation moderated in July, the government reported Friday, giving the Federal Reserve another reason to hold short-term interest rates steady at their September policy meeting. Yields on the long-end of the Treasury curve moved lower after the data.

Prices as measured by the personal consumption expenditure — the Fed’s preferred way of measuring inflation — grew just 0.3 percent in the 12 months ending July.

The core gauge of the Fed’s favorite inflation gauge grew 1.2 percent. This is down from the 1.3 percent pace that had been locked in over the first six months of the year. It remains very low will take some time for inflation to return to the 2 percent target.

Economists are also concerned that weakness in China, which has sparked a downshift in commodity prices, might cause another deflationary shock in the U.S. economy.

Former Fed governor Randall Kroszner said Thursday that this concern might be enough to keep the U.S. central bank on hold until the December meeting.

Fed officials had been leaning towards hiking rates in September before the sharp financial market volatility sparked by China’s surprise currency devaluation earlier this month.

The markets calmed after New York Fed President William Dudley said that a rate hike in September was “less compelling.”

The Fed’s official view is that it wants to be reasonably confident that inflation is moving toward its 2 percent target before hiking rates.

The government also reported that consumer spending in the U.S. rose 0.3 percent in July, while some analyst expected a 0.4 percent increase.

Spending looks firmer underneath the surface as the government revised consumer spending in June to an increase of 0.3 percent, compared with an original estimate of 0.2 percent growth.

Meanwhile, personal income rose 0.4 percent for the fourth straight month.

Wages and salaries rose 0.5 prcent last month, the biggest increase since November 2014.

Higher income than spending boosted the savings rate to 4.9 percent in July from 4.7 percent in the prior month.

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