The Federal Reserve continues to face significant inflation pressures as PCE inflation reached 3.7% year-over-year in July, remaining well above the Fed's 2.0% target threshold. According to the latest Commerce Department data, the PCE index rose 0.2% month-over-month, reversing June's 0.1% decline and slightly exceeding economist forecasts of 3.6% annual inflation. The PCE Core inflation stands at 3.3%, which bottomed at 2.6% in April 2025, while PCE Goods inflation reached 3.7%, having bottomed at -1.2% in September 2024. The PCE Services component also hit 3.7%, with the services bottom occurring in October 2025. Energy prices have remained elevated due to ongoing Middle East conflicts, with $4 gas and $5.60 diesel reflecting the impacts of the war in Iran. As Navy Federal Credit Union's Heather Long noted, "The impacts of the war in Iran are still apparent with $4 gas and $5.60 diesel. The data still gives the Federal Reserve time to wait and see. It's not getting worse, but it didn't get any better in July either."
The core PCE index for July sped up marginally to 0.2% month-over-month and matched June's rate of 3.3% year-over-year, exactly meeting economist projections. As Investing.com reports, excluding energy and food, the underlying core PCE index showed this performance. Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management, noted that "although many of the PCE numbers were worse than expected, the most important one – YoY Core PCE – held constant and that will give the Fed more time to leave rates on hold." The month-over-month readings are getting worse, but analysts believe enough of the FOMC will want to wait for more data before making rate decisions. The PCE Month-Over-Month data shows 0.2% inflation with goods at -0.11%, though the reported goods inflation figures are considered suspect by market analysts. Jeffrey Roach from LPL Financial expects improvements in inflation in coming months, with the prospect of retailers using tariff rebates to cut consumer prices potentially lowering core inflation below 3% as soon as October. Economists polled by Reuters, Dow Jones and Bloomberg had expected just 0.1% monthly growth and an annual rise of 3.6%, making the actual reading a significant miss. Services prices rose 0.3% month-over-month, driven by continued upward movement in categories such as financial services, insurance, and housing, reflecting that service inflation remains sticky.
The latest inflation data has exceeded market expectations, with the Econoday consensus forecasting 0.1% month-over-month and 2.6% year-over-year growth. According to Investing.com, the actual PCE inflation data came in higher than these expectations, raising questions about whether 3.3% represents the new 2.0% benchmark that the Fed has been targeting. The PCE Month-Over-Month data shows 0.2% inflation with goods at -0.11%, though the reported goods inflation figures are considered suspect by market analysts. New York Fed president John Williams has indicated that if monthly PCE inflation comes in at 0.2% or lower, it would suggest inflation is returning to the Fed's 2% target without requiring rate hikes. Traders' expectations were little changed by the latest inflation data, as the CME FedWatch tool shows a 59.9% chance of the Fed holding rates steady next month, compared with a 66.9% probability a week ago. The tool also shows a 40.1% chance of a 25-basis-point rate hike – up from 33.1% a week ago. With the hotter-than-expected PCE reading coming on the heels of an as-expected consumer price index reading for July, it had weakened expectations that Warsh and his fellow policymakers would act decisively by raising the federal funds rate in September. Market-implied odds that the Fed will hold rates steady in September had increased only slightly Wednesday morning from prior-day levels around 60%, according to CME FedWatch. Following the data release, U.S. Treasury yields ticked higher, stock index futures slipped, and spot gold dropped in the short term, reflecting that the market did not view the report as a clear signal for monetary easing.
The BEA's report found that Americans' personal income increased by 0.4%, up from 0.2% in June and above expectations. However, personal spending growth cooled slightly to 0.2% from 0.3%, but was still faster than estimates of 0.1%. According to Investing.com, this resilient consumer spending partially underpinned the U.S. economy in the second quarter, with gross domestic product expanding by 1.5% at an annualized pace. Massive investments in artificial intelligence infrastructure also fueled this growth. However, after adjusting for price changes, real personal consumption expenditures were flat month-on-month, down from 0.4% in June, indicating that while household income continues to grow, consumer momentum has slowed noticeably from previous levels. This set of data is not entirely positive for the Federal Reserve. Although core PCE did not exceed expectations, the 3.3% year-over-year growth rate remains noticeably higher than the 2% policy target, implying that inflation has not yet returned to the level the Fed wishes to see. The personal savings rate as a percentage of disposable personal income was 3% in July, up from 2.6% in June and the highest since a 3.5% reading in March. Since the start of 2025, the personal savings rate has declined from a peak of 5.5% in April 2025, and it began this year at 4.4%. Consumer fatigue is real, as spending adjusted for inflation was flat in July, with Navy Federal Credit Union noting that "consumer fatigue is real. Spending adjusted for inflation was flat in July."
With inflation showing little sign of improving, market participants are split on the Federal Reserve's next policy move. Fed governors Lisa Cook and Christopher Waller have indicated readiness for potential action if conditions warrant. Fed Gov. Lisa Cook said in a speech "If I do not see signs of continued disinflation soon, I am prepared to act." Fed Chair Kevin Warsh also signaled during his post-FOMC meeting news conference that the central bank is weighing whether the time is right to raise interest rates. The Fed is scheduled to hold its next policy meeting on September 15-16, and the market expects policymakers to leave the benchmark federal funds rate unchanged at its current level of 3.5% to 3.75%. However, Bret Kenwell from Etoro noted that inflation "remains well above the Fed's 2% target, and a hotter-than-expected reading could renew pressure on policymakers to keep interest rates higher for longer. That could put pressure back on equities, particularly if yields continue to push higher." Wednesday's inflation print is the last major economic release Fed policymakers will have in hand as they meet at the end of this week in Jackson Hole, Wyo., for an annual economic symposium. The gathering includes a highly anticipated speech by Kevin Warsh on Friday morning, his first since becoming Fed chair in late May, with Warsh facing rising pressure to tackle inflation that has been above the Fed's target threshold for more than five years. Markets will next turn their focus to the Jackson Hole Economic Symposium, where Federal Reserve Chair Kevin Warsh is scheduled to deliver a keynote address on August 28, with investors hoping to find more clues regarding inflation assessments, the economic outlook, and the future interest rate path.
