Inflation stayed subdued in July and consumer spending lost some steam, according to a key government report released Wednesday that gives Federal Reserve officials more leeway to hold interest rates steady in the coming months.
The personal consumption expenditures (PCE) price index—the Fed’s preferred inflation gauge—rose 0.2 percent from June, slightly above the 0.1 percent forecast. On a year-over-year basis, the index climbed 3.7 percent, matching the previous month’s reading and coming in a touch above consensus expectations.
Core PCE prices, which strip out volatile food and energy categories, also rose 0.2 percent month over month, in line with analyst estimates. The annual core figure held at 3.3 percent, unchanged from June and matching forecasts.
The data suggest that underlying inflationary pressures have not intensified, even as oil prices have ticked up amid ongoing tensions in the Middle East. In June, the overall PCE index actually declined by 0.1 percent, largely thanks to falling energy costs. Energy prices within the PCE gauge dropped 1.5 percent last month, though analysts expect higher oil prices may start showing up in inflation readings in August or September.
Consumer Spending Cools
Consumer spending rose 0.2 percent in July, a touch faster than the 0.1 percent economists had expected, but a slowdown from June’s 0.3 percent gain. After adjusting for inflation, the picture was softer: spending on core goods fell 0.8 percent, real durable goods purchases dropped 1.4 percent, and nondurable goods spending slipped 0.2 percent. Services spending, however, rose 0.3 percent.
The moderation in spending, combined with the benign inflation figures, is likely to be seen by Fed officials as providing breathing room to hold off on further rate hikes, especially with the midterm elections looming.
Market-implied odds of a September rate hike stood at roughly 38 percent on Wednesday morning, according to fed funds futures, down from about 40 percent the day before. The probability of more than one hike by the end of the year has fallen sharply—from around 60 percent a month ago to about 28 percent.
One-Off Factors at Play
Analysts pointed to a few temporary factors that may have skewed the spending picture. Amazon’s decision to hold its Prime Day sales event in June rather than July likely pulled some consumer purchases forward into early summer. Additionally, higher-than-expected tax refunds tied to the Trump administration’s One Big Beautiful Bill appear to have boosted spending during the spring and early summer, but that effect is now fading.
Alternative inflation measures from the Federal Reserve banks of Cleveland and Dallas also suggest price pressures are contained. The Cleveland Fed’s median PCE inflation rose 0.2 percent in July and was up 2.7 percent from a year earlier—both figures matching June’s readings, indicating no acceleration or deceleration in inflation. The Dallas Fed’s trimmed mean inflation measure rose at an annual pace of 2.2 percent in June, and over the past six months it’s been running at a 2.3 percent annual pace, in line with its 12-month gain.
The overall picture is one of a gradually cooling economy with inflation still above the Fed’s 2 percent target but showing little sign of picking up momentum. That combination is likely to keep the central bank on hold as it waits for more evidence that price pressures are sustainably easing.
Source: www.breitbart.com — https://www.breitbart.com/economy/2026/08/26/pce-price-index-august/