US July PCE Inflation Hits 3.7%, Giving Fed Room to Hold Rates

Original author: Zhang Yaqi

Original source: Wallstreetcn

US consumer spending unexpectedly stalled in July, while a key inflation gauge remained moderate, providing further data support for the Federal Reserve to keep interest rates unchanged.

The Commerce Department's Bureau of Economic Analysis reported Wednesday that the personal consumption expenditures (PCE) price index rose 0.2% month-over-month in July, above market expectations of 0.1%, with the year-over-year increase holding at 3.7%. The core PCE index, which excludes food and energy, also rose 0.2% month-over-month, with the year-over-year rate steady at 3.3%, in line with expectations. Meanwhile, inflation-adjusted real personal spending was flat month-over-month, following strong gains in May and June.

The data corroborate a series of recent economic reports indicating that the US economy cooled in July after a strong expansion in early summer. For Fed officials, the figures will further support the case for pausing rate hikes, but core PCE remains well above the Fed's 2% target, and inflationary pressures have not fully dissipated.

Market attention now turns to the annual central bankers' conference in Jackson Hole, Wyoming, on Friday. Investors will closely watch Fed Chair Warsh's speech for his latest remarks on how to address persistent inflation.

Core Inflation Steady as Expected, but Still Far Above Fed Target

The core PCE index rose 3.3% year-over-year in July, unchanged from June and in line with expectations, indicating that underlying inflation pressures are stabilizing. However, the Fed's preferred inflation gauge—the headline PCE index—remained at 3.7% year-over-year, still a considerable distance from the central bank's 2% target.

By category, nondurable goods prices continued their downward trend in July, and lower crude oil prices also dragged down the energy component of PCE.

Notably, a significant increase in the cost of portfolio management services was one of the structural factors pushing up overall prices, linked to stock market performance.

Nominal Spending Rises, Real Purchasing Power Under Pressure

Nominal personal spending rose 0.2% month-over-month in July, and personal income increased 0.4%, both slightly above expectations.

However, inflation-adjusted real spending was flat month-over-month, reflecting the erosion of real purchasing power by price pressures.

Income growth has generally slowed year-over-year. Government employee wage growth fell to 1.4% year-over-year, the lowest since March 2021; private sector wage growth slowed from 4.6% to 3.8%, the lowest since March 2026.

The slowdown in income growth may be prompting consumers to become more cautious—the saving rate rebounded notably in July from a four-year low.

Jackson Hole Speech in Focus

Against this data backdrop, market attention shifts to Warsh's remarks at the Jackson Hole symposium on Friday. Investors hope to gain clarity on how the Fed will weigh the monetary policy path amid inflation persistently above target.

The current PCE data, together with previously released CPI and PPI figures, paint a picture of easing but not fully dissipated inflation, providing Warsh with some policy flexibility. Meanwhile, a separate report released the same day showed that second-quarter GDP growth was unchanged from the initial estimate, but details pointed to stronger consumer spending, adding some support to the economic outlook.