Fed Inflation Gauge Meets Expectations, Rate-Cut Outlook Holds
On a monthly basis, prices increased 0.2% from June. Core PCE—which excludes volatile food and energy categories—also matched estimates.
Quick overview
- The latest inflation data indicates a year-over-year rise of 2.6% in the PCE price index, aligning with forecasts but remaining above the Federal Reserve's 2% target.
- Core PCE inflation increased to 2.9% year-over-year, slightly above June's figure, while monthly prices rose by 0.2% from June.
- Market reactions were muted, with an 87.2% probability of a 25-basis-point rate cut in September, as Treasury yields eased.
- Political pressures on the Fed are mounting, highlighted by recent comments from Fed Chair Jerome Powell and the dismissal of Fed Governor Lisa Cook by former President Trump.
The latest inflation reading failed to spark enthusiasm on Wall Street but reinforced expectations of an upcoming rate cut. Still, the figures confirm that inflation remains above the Federal Reserve’s 2% target.
The Personal Consumption Expenditures (PCE) price index rose 2.6% year-over-year in July, in line with forecasts, according to the Bureau of Economic Analysis (BEA). The Fed’s preferred gauge of inflation comes at a time when the central bank has signaled the possibility of lowering interest rates.
On a monthly basis, prices increased 0.2% from June. Core PCE—which excludes volatile food and energy categories—also matched analyst estimates. It rose 2.9% year-over-year, slightly above June’s 2.8%, and increased 0.3% month-over-month, the same pace as in June.
Markets showed little reaction to the data. According to CME’s FedWatch, the probability of a 25-basis-point rate cut in September held at around 87.2%, nearly unchanged from prior days. Treasury yields eased, with the 2-year yield down 6 basis points and the 10-year yield 3 basis points lower.
Inflation Above Target
Despite the in-line reading, inflation remains stubbornly above the Fed’s 2% annual target. PCE has stayed over that threshold for 53 consecutive months, marking the second-longest stretch since the early 1970s, according to Pepperstone.
Inflation has climbed from its April lows, though the full effect of recently imposed tariffs has yet to filter through. Services remain “hot,” while goods and energy prices have slowed—a dynamic worth noting given that tariffs directly impact goods, not services.
Political Pressure on the Fed
The release comes shortly after Fed Chair Jerome Powell, speaking at the Jackson Hole symposium last week, opened the door to a potential rate cut at the central bank’s next meeting—despite ongoing attacks from former President Donald Trump.
Adding to the political turmoil, Trump dismissed Fed Governor Lisa Cook, a move that has since been challenged in court by the official.
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