Inflation Hit 2.9% Last Month As Prices Rose As Expected Last Month, Fed's Gauge Shows

The core Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge, registered 2.9% annually in July, matching Wall Street expectations but marking the 53rd consecutive month above the Fed's 2% target. This persistent inflation complicates investor hopes for an interest rate cut at the upcoming September FOMC meeting, despite earlier signals from Fed Chair Jerome Powell and current CME FedWatch odds of 85.3% for a quarter-point reduction. The data suggests the Fed faces continued pressure to maintain its restrictive policy, potentially delaying anticipated monetary easing.

Analysis

The July core Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge, registered a 2.9% year-over-year increase, aligning with analyst forecasts but marking the 53rd consecutive month above the Fed's 2% target. This persistent inflation, coupled with a stable headline PCE of 2.6%, complicates the path forward for monetary policy, especially as this is the final key inflation report before the September FOMC meeting. A significant disconnect exists between this data and market expectations; CME's FedWatch tool indicates an 85.3% probability of a rate cut, a figure that has moderated from a high of 99.9% earlier in the month. The situation is further muddled by conflicting signals, including dovish dissents from Fed governors Bowman and Waller and political pressure for easing, contrasted with Chair Powell's warnings about the inflationary impact of tariffs—a risk echoed by UBS and Bank of America analysts who project core PCE could rise to 3.1%. The current economic data, as one analyst noted, does not inherently support a rate cut, suggesting any September easing would be driven more by risk management and external pressures than by a clear victory over inflation.

Key Decisions for Investors

• Investors should be cautious of the significant disconnect between the 85.3% market-implied probability of a September rate cut and the persistent 2.9% core PCE inflation, which could lead to a hawkish surprise from the Fed.
• Monitor developments in U.S. trade policy and tariffs closely, as they are explicitly cited as a key upside risk to inflation that could compel the Fed to delay or limit its anticipated monetary easing.
• Given the conflicting signals from economic data, internal Fed dissents, and external political pressures, consider strategies that account for heightened volatility around the September FOMC meeting's announcement and forward guidance.