A key inflation metric watched by the Federal Reserve accelerated in July, reflecting persistent price pressures in the U.S. economy amid ongoing trade tariffs.
The core personal consumption expenditures (PCE) price index, which excludes volatile food and energy costs, rose to a 2.9% annual rate, the Commerce Department reported Friday. This was up 0.1 percentage point from June, marking the highest level since February, though it matched the consensus forecast. On a monthly basis, the core index increased by 0.3%, also in line with expectations.
The headline PCE index, which includes all items, climbed 0.2% for the month and 2.6% from a year ago, meeting analyst predictions.
The Federal Reserve uses the PCE index as its primary inflation gauge and targets a 2% rate. Friday’s report shows inflation remains significantly above the central bank’s comfort level. Despite this, markets still anticipate the Fed will lower its benchmark interest rate at its next meeting.
Fed Governor Christopher Waller recently reiterated his support for a rate cut, stating he would consider a larger move if the labor market continues to weaken.
“The Fed opened the door to rate cuts, but the size of that opening is going to depend on whether labor-market weakness continues to look like a bigger risk than rising inflation,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “Today’s in-line PCE Price Index will keep the focus on the jobs market. For now, the odds still favor a September cut.”
The report also showed continued strength from consumers, with spending increasing by 0.5% and personal income growing by 0.4%, both matching forecasts. Following the data release, stock market futures remained negative while Treasury yields held their gains.
A detailed look at the data shows that a 2.7% annual decline in energy prices helped moderate the headline figure. In contrast, food prices rose 1.9% over the year. A significant driver of inflation was the services sector, where prices jumped 3.6% annually, compared with just a 0.5% increase for goods.
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