US July PCE Price Index Rises 3.7% YoY, Giving the Fed Room to Hold Rates Steady

Original Author: Zhang Yaqi

Original Source: Wall Street CN

U.S. consumer spending unexpectedly stalled in July, while a key inflation gauge rose moderately, providing further data support for the Federal Reserve's stance on holding interest rates steady.

Data released by the Bureau of Economic Analysis on Wednesday showed that the Personal Consumption Expenditures (PCE) price index rose 0.2% month-over-month in July, slightly above the 0.1% market expectation, while the year-over-year increase held at 3.7%. The core PCE index, which excludes food and energy, also rose 0.2% month-over-month, with its year-over-year growth rate remaining flat at 3.3%, in line with market expectations. Meanwhile, inflation-adjusted real personal consumption expenditures were flat month-over-month, following robust gains recorded in both May and June.

These figures corroborate a series of recent economic reports, indicating that the U.S. economy, after a strong expansion in early summer, showed signs of cooling in July. For Federal Reserve officials, this batch of data further supports the argument for pausing rate hikes. However, core PCE remains well above the Fed's 2% policy target, suggesting that inflationary pressures have not fully subsided.

Market attention now shifts to the annual central bank symposium scheduled for Friday in Jackson Hole, Wyoming. Investors will closely monitor the speech by Fed Chair Warsh for his latest remarks on how to address the current persistent inflation.

Core Inflation Matches Expectations but Remains Significantly Above Fed Target

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

Looking at the components, prices for non-durable goods continued their downward trend in July, and lower crude oil prices also dragged the energy component of PCE lower.

Notably, a significant surge in securities portfolio management service costs emerged as one of the structural factors pushing overall prices higher, moving in tandem with stock market performance.

Nominal Spending Grows, Real Purchasing Power Under Pressure

Nominal personal consumption expenditures rose 0.2% month-over-month in July, while personal income grew 0.4% month-over-month, with both figures slightly exceeding expectations.

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

Income growth on an annualized basis has been showing a slowing trend overall. Among the details, wage growth for government employees fell to 1.4% year-over-year, the lowest level since March 2021. Private-sector wage growth slowed from 4.6% to 3.8% year-over-year, marking the lowest reading since March 2026.

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

Jackson Hole Speech Becomes Market Focus

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

The current PCE data, combined with the previously released CPI and PPI figures, paints a picture of easing but not yet fully subsided inflation, providing Warsh with a degree of narrative space on policy. Meanwhile, another report released the same day showed that U.S. second-quarter GDP growth matched its initial estimate, though the details pointed to stronger consumer spending, adding some support to the economic outlook.