US Core PCE Holds at 2.9% in July, Matches Forecasts

Key Insights:

• Core PCE inflation rose to 2.9% in July, up from June’s 2.8%, meeting forecasts.
• Consumer spending grew 0.5% while personal income increased 0.4%, both aligning with market expectations.
• Markets anticipate a Fed rate cut in September as inflation holds above the 2% target.

Core inflation in the United States rose to 2.9% in July, according to the Commerce Department. The figure matched forecasts and was slightly higher than June’s 2.8%.

Inflation Stays Above Fed Target

The core personal consumption expenditures (PCE) price index, which excludes food and energy, is the Federal Reserve’s preferred inflation gauge. July’s 2.9% reading remains above the Fed’s 2% goal, keeping inflationary pressure in focus.

On a monthly basis, the core PCE index increased 0.3%. The broader PCE index, which includes food and energy, climbed 2.6% over the year and 0.2% from the previous month. Energy prices fell 2.7% from a year earlier, while food prices were up 1.9%. Services prices rose 3.6% annually compared with a 0.5% increase for goods.

Spending and Income Growth

Consumer spending rose 0.5% in July, meeting expectations and showing continued resilience. Personal income increased 0.4%, also in line with forecasts.

On a monthly breakdown, energy costs dropped 1.1% and food slipped 0.1%. Services prices gained 0.3%, offsetting a 0.1% decline in goods.

Fed Policy and Market Outlook

The Federal Reserve targets 2% inflation as part of its long-term mandate. Core PCE is viewed as a better guide than the headline measure because it strips out volatile items.

Market expectations point to another interest rate cut when the Fed meets next month. Fed Governor Christopher Waller said he would consider a larger move if labor market data weakens further.

Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said, “Today’s in-line PCE Price Index will keep the focus on the jobs market. For now, the odds still favor a September cut.”

Stock futures traded lower after the release, while Treasury yields held steady.