U.S. PCE Inflation Matches Expectations in July, Strengthening Case for Fed Rate Cut
The U.S. Commerce Department reported on Friday that its Personal Consumption Expenditures (PCE) Price Index rose 0.2% in July, after an unrevised 0.3% increase in June. The figure was fully in line with forecasts from economists polled by Reuters.
On a yearly basis, PCE inflation rose 2.6% through July, unchanged from June. Excluding food and energy, the core PCE Price Index advanced 0.3% in July, matching June’s increase. Over the past 12 months, core PCE inflation rose 2.9%, up slightly from 2.8% in June. The Federal Reserve closely tracks the PCE index as its preferred inflation measure, with a 2% long-term target.
Market Reaction: Following the release, S&P 500 e-mini futures trimmed earlier losses, trading down 17 points, or 0.26%. U.S. Treasury yields briefly pulled back before climbing again, with the 10-year yield up 2.3 basis points to 4.23% and the two-year yield up 0.2 basis point at 3.637%. Meanwhile, the U.S. dollar index held firm, gaining 0.21% to 98.09.
Economists’ Commentary:
- Brian Jacobsen, Chief Economist at Annex Wealth Management, said July spending showed renewed strength, especially in durable goods led by auto sales. He added that July’s improvement followed weaker data earlier in the summer, partly due to tariff uncertainty.
- Michael Lorizio, Head of U.S. Rates Trading at Manulife Investment Management, noted that PCE came in exactly as expected. He emphasized that CPI and PPI data allow markets to predict PCE with high accuracy, reducing the surprise factor.
- Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, argued that July’s data increases the likelihood of a Fed rate cut in September. He highlighted that upcoming CPI and PPI reports in September will be crucial, but unless inflation spikes, a 25-basis-point cut seems almost certain.
- Art Hogan, Chief Market Strategist at B. Riley Wealth, echoed that the numbers were “right down the middle,” leaving the Fed room to cut rates not only in September but potentially again in October and December.
Overall, the July PCE inflation report reinforced expectations that the Federal Reserve will move ahead with rate cuts at its September meeting, barring any major upside surprises in upcoming inflation data.
