WASHINGTON, D.C. — The US Federal Reserve's (Fed) favored measure of inflation held steady in July according to government data on Friday, sustaining expectations that the central bank is on its way to interest rate cuts starting next month.

The personal consumption expenditures (PCE) price index edged up on a monthly basis from 0.1 percent in June to 0.2 percent last month, in line with analysts' expectations.

But from the same period a year ago, the PCE price index held firm at 2.5 percent, the Department of Commerce said.

Excluding the volatile food and energy segments, PCE inflation was also steady.

"Today's report shows we are making real progress, with inflation falling to 2.5 percent continuing at the lowest level in more than three years," said President Joe Biden in a statement.

These add to signs that the Fed will gradually lower the benchmark lending rate from decades-high levels, starting from its next policy meeting in September.

The central bank had rapidly raised borrowing costs in recent years to tackle soaring inflation.

"Economic fundamentals continue to point to sustainable disinflation," said EY chief economist Gregory Daco in a recent note.

There has been increased pricing sensitivity, easing in shelter cost inflation and moderating wage growth, he added.

"Unless labor conditions deteriorate materially in the coming weeks, we continue to expect a majority of policymakers will favor a 25-basis-points cut in September," Daco added.

Gradual cuts

In July, prices for goods decreased by less than 0.1 percent month on month and those for services rose 0.2 percent, said the Commerce Department of PCE inflation.

Spending rose 0.5 percent from June to July, more than expected and accelerating from the prior month.

This indicates that consumption which has supported economic growth continues to hold up, too.

"The concern is that spending gains are not being matched by rising incomes," said Michael Pearce of Oxford Economics.

He noted, however, the strength of household balance sheets despite a lower saving rate.

"With the consumer still strong, the risks of a recession do not appear especially elevated, and [this] supports the case for the Federal Reserve to proceed with its rate-cutting cycle only gradually," Pearce said.

Last Friday, Fed Chairman Jerome Powell said the time had come for the country to begin lowering interest rates, adding his confidence had risen that the battle against inflation was on track.

But with payroll numbers due next week, Nationwide senior economist Ben Ayers warned that "the door is open for larger decreases if economic conditions weaken more than expected."