A new reading of the Federal Reserve’s preferred inflation gauge showed prices continuing to edge higher in July, but analysts say the increase is unlikely to derail expectations for an interest rate cut at the Fed’s September meeting.
“Today’s in-line PCE Price Index will keep the focus squarely on the labor market,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “For now, the odds still favor a September cut. But the size of that move will depend on whether labor-market weakness continues to pose a bigger risk than inflation.”
The July report showed that the Personal Consumption Expenditures (PCE) Price Index on a “core” basis—excluding food and energy—rose 2.9% year over year, up from 2.8% in June and marking the highest level since February. On a monthly basis, core prices rose 0.3% for the second straight month. Headline PCE inflation rose 2.6% annually, unchanged from June, while month-over-month prices increased 0.2%, a step down from the 0.3% rise in the prior month.
The market reaction was muted but negative, with the S&P 500 (^SPX) trading down roughly 0.70% following the release. Meanwhile, the data showed consumer spending accelerated in July, offering some evidence of resilience despite tighter financial conditions.
Economists stressed that July’s higher core reading was not driven by tariffs, but rather by services inflation. “That’s further evidence that tariffs are having minimal impact on goods prices,” said Harry Chambers, assistant economist at Capital Economics. He noted that core goods prices were unchanged for the month, while core services rose 0.36% month over month, consistent with the strength previously seen in services CPI.
While inflation is not yet trending toward the Fed’s preferred 2% target, policymakers appear more concerned with softening in the labor market. In his speech last week at the Jackson Hole symposium, Fed Chair Jerome Powell said the impact of tariffs is more likely to deliver a one-time price adjustment rather than a persistent increase. More importantly, Powell emphasized the downside risks to employment, pointing to July’s weaker payrolls report and downward revisions to job growth in prior months.
“There has been a marked slowing in both the supply of and demand for workers,” Powell said. “If those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
That makes the September 5 jobs report, covering August payrolls, potentially decisive for the Fed’s next policy move. Should further weakness in the labor market materialize, markets expect the central bank to follow through with at least a 0.25% rate cut at its September meeting, with the possibility of further easing later this year.
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