Core Inflation Hits 2.9% in July as Forecasted, Reinforcing Fed’s Cautious Tone

Fed’s Key Inflation Gauge Holds Firm – What’s Next for Rates?

The Federal Reserve’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) price index, rose 2.9% year-over-year in July, in line with expectations.

The headline PCE index, which includes food and energy, increased 2.6% from a year earlier.

On a monthly basis, core PCE climbed 0.3%, while headline PCE rose 0.2%.

With core inflation still well above the Fed’s 2% target, the report signals that price pressures remain persistent, particularly in services. The in-line data won’t force an immediate policy shift, but it supports the central bank’s stance of keeping rates elevated until clearer progress on disinflation is achieved.

Consumer Spending Climbs, Driven by Services and Goods

Personal consumption expenditures increased by $108.9 billion, or 0.5%, last month. Services spending led the gains with a $60.2 billion rise, while goods purchases rose $48.7 billion. In real terms, consumption was up 0.3%, indicating steady demand even after adjusting for inflation.

The strength in spending highlights the resilience of the U.S. consumer, a key pillar supporting economic growth. However, with real disposable income rising just 0.2%, the widening gap raises concerns about how long consumption can remain robust without stronger wage growth or lower inflation.

Savings Rate Drops as Income Growth Trails Spending

Personal income grew by 0.4% in July, matching the rise in disposable income. But as consumers increased their outlays, the personal saving rate dipped to 4.4%, down from 4.6% in June. This decline signals that households may be relying more on savings to maintain their consumption patterns, a trend that could limit spending capacity if inflation remains sticky.

The compensation-driven income growth was solid, but not strong enough to keep pace with spending, keeping the pressure on household balance sheets.

Fed Policy Outlook: No Surprises, But No Relief Either

With core inflation tracking in line with forecasts but remaining elevated, the data gives the Fed no immediate reason to cut rates. The 0.3% monthly gain in core PCE equates to an annualized pace that’s still above comfort levels, reinforcing the “higher-for-longer” message. Policymakers are likely to stay cautious, emphasizing sustained disinflation over one-off improvements.

Market Forecast: Bonds Bearish, Equities Cautiously Mixed

For traders, the report maintains the status quo—persistent inflation and resilient spending will likely keep Treasury yields under upward pressure. Rate-sensitive sectors may face renewed stress, while consumer discretionary could hold up in the near term. Expect near-term bearish sentiment in bonds, with equities remaining rangebound unless new data drives a policy pivot.