Fed's Preferred Inflation Gauge Holds Steady, In Line with Forecasts

The Federal Reserve’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) Price Index, rose to 2.9% annually in July, up from 2.8% in June but matching consensus forecasts. The in-line data solidified market expectations for a September interest rate cut, though major indices saw a mixed to slightly negative reaction as inflation remains persistently above the Fed’s 2% target.

The U.S. Commerce Department reported on Friday that its PCE Price Index rose 0.2% in July, versus the unrevised 0.3% rise in June and matched the estimate of economists polled by Reuters. In the 12 months through July, PCE inflation increased 2.6% after climbing 2.6% in June. Stripping out the volatile food and energy components, the so-called core PCE Price Index increased 0.3% last month. That followed a 0.3% rise in the core inflation in June.

Market reactions were modest, with S&P 500 emini futures slightly paring declines and U.S. Treasury yields briefly paring gains. Economists generally viewed the results as in line with expectations, noting a jump in durable goods spending and healthy real income advances, but one expert suggested the inflation measure would not reduce the odds of a September rate cut.

Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, said, “You can check this off as one more risk to potentially derailing a cut in September. The inflation part of it, at least in this measure, is not going to do anything to reduce odds of a cut in September.”

Brian Jacobsen, Chief Economist at Annex Wealth Management, noted that, “After two months in the dumps, spending on durable goods jumped in July, driven by autos. Real incomes excluding transfer receipts—a key recession indicator—showed a healthy advance in July. Peak tariff uncertainty in May and June weighed on jobs, spending, and incomes. Hopefully the relief in July can continue without too much permanent damage being done.”