Inflation Data Rises Slightly Above Expectations
The inflation measure favored by the Federal Reserve saw a minor uptick in July, with price increases staying above the central bank’s target range.
According to the Commerce Department’s report released on Wednesday, the personal consumption expenditures (PCE) index rose by 0.2% from June to July, and year-over-year, it increased by 3.7%. These numbers were higher than what economists surveyed by LSEG had predicted, which were 0.1% and 3.6%, respectively.
The core PCE, which excludes the often fluctuating food and energy prices, also saw a monthly rise of 0.2% and was 3.3% higher than the previous year. These figures aligned with the expectations from the LSEG poll.
Fed Officials Consider Multiple Rate Increases
Policymakers at the Federal Reserve are particularly attentive to the PCE headline figure as they aim to drive inflation back down to their long-term target of 2%. While the core data is often viewed as a more reliable gauge, both headline and core PCE remained unchanged at 3.7% and 3.3%, respectively, compared to June.
In July, the prices of goods were 1.3% higher than they were a year prior, which followed a monthly decrease of 0.6%. Conversely, services prices rose by 2.5% year-over-year and had an increase of 0.3% compared to the month before.
Credit Card and Auto Loan Delinquencies Stay Elevated
The personal savings rate climbed to 3% in July from 2.6% in June, marking the highest rate since March’s 3.5%. However, it’s worth noting that since the beginning of 2025, the personal savings rate has dropped from a high of 5.5% in April 2025, and it started this year at 4.4%.
Expert Opinions on Current Economic Conditions
Heather Long, chief economist at Navy Federal Credit Union, remarked that the U.S. is still grappling with inflation, citing that PCE inflation came in higher than anticipated. She pointed out that factors like rising fuel prices due to ongoing conflicts contribute to the situation. Long suggested that while the situation isn’t worsening, there hasn’t been significant improvement either, with inflation-adjusted spending being flat in July.
Jeffrey Roach, chief economist at LPL Financial, expressed optimism for the coming months, anticipating that inflation may improve as retailers might use tariff rebates to lower consumer prices. He indicated that core inflation could potentially dip below 3% by October, offering a glimmer of hope. That said, he warned that services inflation remains high, and the ongoing risk leans toward inflation.
Outlook for the Fed and Interest Rates
The Federal Reserve’s next policy meeting is scheduled for September 15-16, where it’s expected that the benchmark federal funds rate will remain unchanged at the current level of 3.5% to 3.75%. The latest inflation data did not significantly change traders’ expectations, as the CME FedWatch tool shows a 59.9% probability of rates holding steady next month, compared to a 66.9% chance a week prior. There’s also a 40.1% likelihood of a 25-basis-point rate hike, an increase from 33.1% last week.
Market Reactions
Bret Kenwell, a U.S. investment analyst at eToro, commented that inflation remains significantly above the Fed’s 2% target. A stronger-than-expected reading could revive pressure on policymakers to maintain higher interest rates for an extended period, which might affect equity markets if yields continue to rise.
In early trading, the S&P 500 index saw a slight increase of 0.02%, while the Dow Jones Industrial Average dipped by 0.05%, and the Nasdaq Composite fell 0.17%.
