What economists are watching for in tomorrow's PCE inflation and spending data

Upcoming PCE inflation data is critical, with the core PCE index projected to rise 0.3% in July, indicating higher tariff-driven inflation despite slowing economic growth. While this elevated inflation is not expected to prevent a September interest-rate cut, it could constrain the scope of subsequent rate reductions.

Analysis

The market is closely watching the upcoming Personal Consumption Expenditures (PCE) data, with the core index, the Federal Reserve's preferred inflation barometer, forecast to rise by 0.3% in July. These inflationary pressures are being attributed, in part, to the economic pass-through of higher tariffs. This development is occurring within a challenging macroeconomic context where economic growth is simultaneously showing signs of losing momentum. While a September interest-rate cut is still widely anticipated to proceed, the hotter-than-desired inflation reading could significantly constrain the scope of any subsequent rate reductions. This creates a more uncertain outlook for the path of monetary policy, as the Fed must balance the need to support a slowing economy against the risk of persistent inflation.

Key Decisions for Investors

• Investors should monitor the upcoming PCE release closely, as a figure exceeding the 0.3% forecast could increase market volatility and temper expectations for a deep easing cycle.
• Given the dual risks of slowing growth and persistent inflation, it may be prudent to review portfolio exposure to assets highly sensitive to economic cycles and consider hedges against inflation.
• Re-evaluate positions in rate-sensitive assets, as the potential for a limited number of rate cuts, despite the initial September move, could dampen performance for long-duration bonds and growth equities that have priced in a more aggressive easing path.