PCE report shows U.S. inflation remained mostly level in July, though some prices edged up

The latest data from the Department of Commerce reveals that the Personal Consumption Expenditures index, a vital inflation metric used by the Federal Reserve to guide interest-rate decisions, remained stable in July. Inflation in the U.S. saw prices rising at an annual rate of 2.6% last month, consistent with June and in line with economist predictions. Core inflation, excluding volatile food and energy categories, increased by 2.9% from a year ago, slightly up from June’s 2.8% and marking the highest level since February.

The figures highlight why many Fed officials have been cautious about reducing the benchmark interest rate. While inflation is lower than the peak of around 7% three years ago, it continues to exceed the central bank’s 2% target. Consumer spending showed a notable increase of 0.5% from June to July, the most significant rise since March, indicating that Americans are maintaining their purchasing habits despite economic uncertainties. Spending surged notably on durable goods like cars, appliances, and furniture, many of which are imported.

According to Harry Chambers, assistant economist at Capital Economics, the uptick in core inflation was driven by a rise in core services, indicating minimal impact from tariffs on goods prices. Incomes also saw a 0.4% monthly increase, propelled by healthy gains in wages and salaries. Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, predicts that core PCE inflation will likely peak at 3.3% by the turn of the year before easing to about 2.5% by the end of 2026.

Federal Reserve Chair Jerome Powell hinted during his recent Jackson Hole address that policymakers are considering a rate cut for the first time since December 2024. However, Powell emphasized a cautious approach, with future rate cuts contingent on inflation trends. Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, believes that today’s PCE Price Index will shift focus to the job market, with expectations still leaning towards a rate cut in September.

When the Fed reduces its benchmark rate, it typically lowers borrowing costs for mortgages, car loans, and business borrowing, potentially stimulating inflation if the economy grows too rapidly. The Federal Reserve’s decision-making process remains crucial in maintaining economic stability and managing inflation levels.