A report on inflation Friday cou🀅ld confirm that inflation has l🦩ost its bite, and help inform the outlook for how fast and how far the Federal Reserve’s key interest rate will fall in the coming months.

A Bureau of Economic Analysis report Friday is likely to show that consumer prices, as measured by Personal Consumption Expenditures, rose 0.1 percentage points in July from June, according to economists surveyed by Dow Jones Newswires and The Wall Street Journal. That would be the same monthly increase as in June and make for a year-over-year inflation rate of 2.5%, the same as the previous month.

Forecasters expect Friday’s report on PCE inflation to match what a separate report earlier this month, the Consumer Price Index, showed about the trend of consumer price i🃏ncreases: The cost of living has continued to increase only modestly in recent months following a worrisome uptick in the first quarter, and it’s on the path back to the Federal Reserve’s goal of a 2% an꧟nual rate. 

Cooler Inflation, Lower Fed Interest Rates

The report will likely be closely watched by Fed officials, who set the key fed funds rate. This rate influences interest on all kinds of loans, including mortgages, credit cards, and car loans. Fed officials rely on PCE inflation to judge how hig🅘h to set the fed funds rate and will use it to gauge how fast to cut interest rates in the coming months. 

Fed officials, including Fed Chair Jerome Powell, have said they’re preparing to cut the fed funds rate in September. Data from the PCE report and other inflation measures over the past few months have convinced policymakers that price increases have shown inflation is firmly on the path down to 2%. Policymakers are shifting their focus away from trying to slow down the economy with high interestꦯ rates to contain inflation. Instead, they're planning to cut rates in order to spur the economy and prevent unemployment from rising.

A key question for financial markets is whether the Fed will open its campaign with a 0.5 percentage point cut from its current level of 5.25%-5.5%, or opt for a less aggressive quarter-poin𒉰t cut. 

The PCE report is unlikely to settle that question, economists at Deutsche Bank said in a commentary. Instead, the Bureau of Labor Statistics’ report on the job market due Sept. 6 is likely to influence central bankers more—a spike in joblessness could prompt a larger rate cut.