The Federal Reserve's preferred inflation gauge showed a slight acceleration in July, with the personal consumption expenditures (PCE) price index rising 0.2% on a seasonally adjusted monthly basis and 3.7% from a year earlier. Both figures came in 0.1 percentage point above the Dow Jones consensus, according to data released by the Commerce Department.
The headline reading suggests that the recent cooling in inflation has stalled, potentially complicating the Fed's deliberations on whether to maintain restrictive interest rates or consider further hikes. However, the core PCE index, which excludes volatile food and energy prices, rose 0.2% monthly and 3.3% annually, matching economists' expectations exactly. This core measure is widely viewed as a more reliable gauge of underlying inflation trends.
Services remain the primary driver
Price dynamics were mixed across categories. Goods prices declined 0.1% in July, helped by a 2.7% drop in gasoline and other energy-related goods, as well as a 0.9% decrease in furnishings and durable household equipment. In contrast, services prices rose 0.3%, with financial services and insurance up 1.2% and housing costs increasing 0.3%.
The report also showed personal income grew 0.4% and consumer spending advanced 0.2%, both stronger than anticipated. This resilience in household finances and demand, despite elevated price levels, underscores the ongoing strength of the consumer sector.
Market expectations shift
Following the release, financial markets adjusted their rate expectations. According to CME Group's FedWatch Tool, the probability of at least a 25-basis-point hike at the September FOMC meeting fell to 36%, down from roughly 67% earlier in the month. Investors now view December as a more likely window for any potential increase.
The 3.7% headline PCE reading remains well above the Fed's 2% target, but the core figure's alignment with forecasts provides some reassurance. The data leaves the central bank in a delicate position: core inflation is behaving broadly as expected, yet the pace of improvement remains slow, and headline inflation is still elevated.
Treasury yields and fiscal concerns
The inflation data also come amid a sharp rise in government bond yields, with 10-year and 30-year Treasury securities recently hitting their highest levels since 2007. Investors have expressed concerns about the Fed's ability to bring inflation back to target, while growing U.S. debt and budget deficits have added upward pressure on long-term yields.
Treasury Secretary Scott Bessent recently announced plans to increase government debt buybacks, but market participants have questioned whether such measures will meaningfully affect yields. Stock futures pulled back slightly after the report, while Treasury yields moved higher.
Fed officials gather at Jackson Hole
Fed policymakers are convening this week in Jackson Hole, Wyoming, for the central bank's annual symposium. Chairman Kevin Warsh is scheduled to deliver a policy speech on Friday, which will be closely scrutinized for signals on the future path of interest rates. Since taking office in May, Warsh has remained cautious about telegraphing his preferred policy direction, instead letting incoming data and market conditions shape expectations.
As the Fed weighs its next move, the July inflation report highlights the ongoing challenge: core inflation is in line with forecasts, but the headline rate remains stubbornly above target, and the pace of disinflation has slowed. The FOMC's next meeting is set for September 15-16, with markets currently pricing in only about a one-in-three chance of a move at that gathering.
This article is for informational purposes only and does not constitute financial advice.
