US July Core PCE Rose 0.2% MoM in Line With Expectations, Inflation Remains Above 2% Target as Fed Rate Path in Focus

TradingKey - U.S. core inflation in July met market expectations, but the headline PCE increase came in slightly above forecasts. Combined with stagnant real consumer spending, this introduces greater uncertainty into the Federal Reserve's future policy options.

Data released by the U.S. Department of Commerce's Bureau of Economic Analysis on August 26 showed that the core Personal Consumption Expenditures (PCE) price index rose 0.2% month-on-month in July, in line with market expectations and higher than June's 0.1%. The year-on-year increase remained at 3.3%, also consistent with expectations and the previous reading. Although core PCE did not accelerate further, it remains well above the level consistent with the Federal Reserve's 2% inflation target, indicating that underlying inflationary pressures have not fully abated.

The headline PCE price index, which includes food and energy, rose 0.2% month-on-month and 3.7% year-on-year, above the market expectation of 3.6%. Looking at the price breakdown, goods prices fell 0.1% month-on-month in July, somewhat easing overall inflation pressure; services prices rose 0.3%, driven by continued upward movement in categories such as financial services, insurance, and housing, reflecting that service inflation remains sticky.

Meanwhile, U.S. personal income rose 0.4% month-on-month in July, and unadjusted nominal consumer spending grew 0.2%. However, after adjusting for price changes, real personal consumption expenditures were flat month-on-month, down from 0.4% in June, indicating that while household income continues to grow, consumer momentum has slowed noticeably from previous levels.

This set of data is not entirely positive for the Federal Reserve. Although core PCE did not exceed expectations, the 3.3% year-on-year growth rate remains noticeably higher than the 2% policy target, implying that inflation has not yet returned to the level the Fed wishes to see. However, because core PCE did not climb further or diverge significantly from market forecasts, it at least temporarily presents no new inflation shock to monetary policy.

Following the data release, U.S. Treasury yields ticked higher, stock index futures slipped, and spot gold dropped in the short term, reflecting that the market did not view the report as a clear signal for monetary easing.

Markets will next turn their focus to the Jackson Hole Economic Symposium, where Federal Reserve Chair Kevin Warsh is scheduled to deliver a keynote address on August 28, with investors hoping to find more clues regarding inflation assessments, the economic outlook, and the future interest rate path.