July PCE Inflation Gauge Stays Above Fed Target

The Commerce Department reported that the personal consumption expenditures (PCE) price index increased 0.2% from June and was 3.7% higher than a year earlier, both above the median expectations of economists surveyed by LSEG, who had forecast 0.1% and 3.6% respectively. Core PCE, which excludes food and energy, also rose 0.2% month-over-month, matching the LSEG estimate, and was 3.3% above the prior-year level.

Federal Reserve officials continue to monitor the headline PCE figure as they work toward a 2% inflation target, while viewing core data as a more reliable gauge. The headline and core rates were unchanged from June, remaining at 3.7% and 3.3% year-over-year.

Goods prices were 1.3% higher than a year ago after a 0.6% monthly decline, and services prices rose 2.5% year-over-year, up 0.3% from May. The personal savings rate climbed to 3.0% in July, its highest level since March.

Economists offered mixed commentary. Heather Long, chief economist at Navy Federal Credit Union, said the data indicated that inflation pressures persist, noting that gasoline and diesel prices remain elevated and consumer spending adjusted for inflation was flat in July. Jeffrey Roach, chief economist at LPL Financial, projected that inflation could ease in the coming months, citing potential tariff rebates and the possibility of core inflation falling below 3% by October if geopolitical tensions ease.

The Federal Reserve’s next policy meeting is set for Sept. 15-16. Market pricing suggests a 59.9% probability that the benchmark federal funds rate will stay at 3.5%-3.75%, with a 40.1% chance of a 25-basis-point hike, reflecting modestly increased expectations for a rate increase.

Investment analyst Bret Kenwell noted that inflation remaining above the Fed’s target could sustain pressure on policymakers to keep rates higher for longer, which may affect equity markets if bond yields continue to rise.