The Federal Reserve's preferred inflation measure showed little change in July, reinforcing expectations that policymakers may hold interest rates steady at their September meeting.
The Commerce Department's Bureau of Economic Analysis reported that the core Personal Consumption Expenditures (PCE) index, which excludes food and energy, rose 0.2% on a month-on-month basis in July, matching the prior month's increase. On an annual basis, core PCE held steady at 3.3%, in line with forecasts and unchanged from June. Headline PCE increased 0.2% month-on-month, reversing a 0.1% decline in June, while the year-on-year rate remained at 3.7%.
Personal income grew 0.4% in July, up from 0.2% in June and exceeding expectations, while personal spending cooled to a 0.2% gain from 0.3% the prior month. The Commerce Department also revised its estimate for second-quarter GDP growth to an annualized 1.5%, reflecting a slight upgrade from prior data.
Market pricing, as tracked by CME FedWatch, indicates a roughly 60% probability that the Federal Open Market Committee will leave the federal funds rate unchanged in the 3.5% to 3.75% range at its September meeting. A 40% chance is priced for a quarter-point rate hike. Three policymakers on the rate-setting committee dissented in favor of a hike at the prior meeting.
Analysts noted that while some inflation readings exceeded expectations, the stability of core PCE on an annual basis may provide the Fed with additional time to assess further data before making a policy decision. Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, said the core PCE figure's consistency suggests the Fed could maintain its current policy stance. However, he added that worsening month-on-month readings could increase the number of dissenting voices at the next meeting.
Benchmark oil prices fell below $90 per barrel during the week of the report, though the decline had limited immediate impact on broader inflation trends. The Federal Reserve has maintained a 2% inflation target, and recent data suggests progress toward that goal remains gradual.
