• Headline PCE inflation (the Fed’s preferred gauge) rose 0.2% in July, and remained at 2.6% year-over-year, unchanged from June.
• Meanwhile, core PCE inflation (excluding food and energy) rose 0.3% month-over-month, and ticked up to 2.9% year-over-year, its highest since February and slightly above June’s 2.8%.
• Despite inflation holding above the Fed’s 2.0% target, the data aligned closely with expectations and did not derail market expectations for an interest rate cut in September.
• Consumer spending and income both rose in July, with spending up 0.5%, while personal income increased 0.4%, signaling resilience in the consumer sector and bolstering investor confidence.
• Following the release, rate-cut odds for the Fed’s September meeting climbed, traders assigned roughly 85–87% probability to a 25-basis-point cut, and high odds of further easing into year-end.
Key Takeaways
• The headline inflation rate stayed steady at 2.6%, signaling that broad-based price pressures remain contained.
• The modest rise in core inflation suggests lingering services and wage-driven price pressures.
• Data support the Fed’s pivot toward rate cuts starting September 17, with further cuts likely later in the year.
Broader Context
• Markets reacted calmly: S&P 500 futures pulled back modestly, and Treasury yields and the dollar saw slight moves following the release.
• Fed Chair Jerome Powell has signaled the central bank is shifting its primary focus from inflation concerns to labor market conditions, reinforcing the easing narrative, despite political pressure from the Trump administration.
• Upcoming data points, especially the August jobs report and pre-September CPI/PPI readings, will be decisive ahead of next month’s Fed meeting.
Bottom Line
The latest PCE inflation figures for July broadly met expectations: headline inflation remained steady at 2.6%, while core inflation edged up to 2.9%. Consumer spending and income trends stayed solid. This combination has strengthened market conviction that the Federal Reserve will kick off interest rate cuts at its September 17, 2025, meeting, despite inflation still being above its long-term goal.
