The Federal Reserve’s preferred inflation gauge rose slightly in July as the pace of price growth remained well above the central bank’s target ahead.
The Commerce Department on Wednesday reported that the personal consumption expenditures (PCE) index rose 0.2% from a month ago and was up 3.7% on an annual basis in July. Both figures were hotter than the expectations of economists polled by LSEG, who projected readings of 0.1% and 3.6%, respectively.
Core PCE, which excludes volatile measurements of food and energy prices, was up 0.2% on a monthly basis and is 3.3% higher than last year. Both figures were in line with the estimate of the LSEG poll.
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Federal Reserve policymakers are focused on the PCE headline figure as they try to bring inflation back to their long-run target of 2%, though they view core data as a better indicator of inflation. Compared with June’s readings, headline PCE remained at 3.7%, while core PCE also stayed at 3.3%.
Goods prices were 1.3% higher than a year ago in July after declining 0.6% on a monthly basis.
Services prices were 2.5% year over year and increased 0.3% from the prior month in July.
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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%.
Heather Long, chief economist at Navy Federal Credit Union, said in a statement that the U.S. “still has an inflation problem” as PCE inflation “came in hotter than expected.”
“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,” Long said. “A trade war with Canada will only exacerbate inflation woes. Meanwhile, consumer fatigue is real. Spending adjusted for inflation was flat in July.”
Jeffrey Roach, chief economist at LPL Financial, said in a statement that the firm expects improvements in inflation in the coming months, with the prospect of retailers using tariff rebates to cut consumer prices potentially lowering core inflation below 3% as soon as October.
“An inflection point may be approaching, but for now consumers continue to benefit from income growth that is outpacing inflation. Services inflation remains elevated, though there are signs of improvement. For policymakers, the balance of risks still tilts toward inflation,” Roach explained. “If geopolitical tensions ease in the near term, core inflation could fall below 3%, giving investors a reason for optimism.”
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The Fed is scheduled to hold its next policy meeting on Sept. 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%.
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.
Bret Kenwell, etoro U.S. investment analyst, 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.”
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The benchmark S&P 500 index was up 0.02% during early morning trading, while the Dow Jones Industrial Average was down 0.05% and the Nasdaq Composite fell 0.17%.
