- Hotter than expected. The Federal Reserve’s preferred inflation gauge came in at 3.7% year-on-year for July, 0.1 percentage point above economist forecasts, maintaining pressure on a central bank already divided over its next move.
- Spending stalls. Consumer spending was flat in July, giving the Fed some political room to hold rates in September even as inflation runs well above the 2% target.
- Rate-hold odds rise. Markets raised the probability of a September rate hold to approximately 62% after the data, pulling back from an earlier assumption that a 25-basis-point hike was all but certain.
The Personal Consumption Expenditures price index — the Federal Reserve’s preferred inflation measure — rose 3.7% year-on-year in July and 0.2% from June, the Bureau of Economic Analysis reported on Wednesday. Both readings came in 0.1 percentage point above what economists had forecast, according to The Motley Fool. Core PCE — which strips out food and energy — matched expectations at 3.3% year-on-year and 0.2% month-on-month, offering marginally more comfort to those arguing the inflationary surge is narrow rather than broad-based.
Consumer Spending Flat as Energy Weighs
The release’s most notable element was not the price data but the spending figure: personal consumption was effectively flat in July, a marked deceleration from the preceding months. Analysts noted that elevated energy costs — which have contributed significantly to the headline PCE gap with core readings — appear to be compressing household budgets without triggering the kind of wage-price spiral the Fed most fears. For now, that gives the central bank some latitude to assess incoming data before committing to a further rate increase.
The spending stall arrives as the 10-year Treasury yield settled at 4.625% on Tuesday, well below this month’s 5.33% peak, suggesting bond markets have already begun to price in a prolonged pause rather than an active tightening cycle.
Jackson Hole and Warsh’s Communications Gamble
The data lands on the first day of the Jackson Hole Economic Policy Symposium in Wyoming, where Fed Chair Kevin Warsh is due to deliver his debut keynote address as chair on Friday. Markets had already been split on whether September would bring a hike or a hold heading into the symposium; Thursday’s PCE reading — slightly hotter than expected but accompanied by stalling spending — does not resolve that question cleanly.
Warsh has pursued a deliberately leaner communications style since taking office: post-meeting statements run around 130 words, roughly half their previous length, and he has declined to submit his own rate projection to the Fed’s “dot plot.” His Jackson Hole speech is expected to address the criticism that the approach has left investors without sufficient guidance at a sensitive juncture for the economy.
What Comes Next
With inflation at 3.7% on the PCE measure, the Fed remains well above its 2% target — a fact that three FOMC dissenters used to argue for a July rate hike that the majority voted to defer. The September 16-17 meeting will now weigh July’s flat spending data against the August labour market and price releases that arrive before the decision. If spending continues to decelerate and the August PCE shows a similar or softer reading, the case for holding rates through the autumn will strengthen. A rebound in spending alongside another hot print would likely tip the committee back toward the 25-basis-point hike that futures markets are still assigning a 38% probability.