The Fed's favorite measure of inflation is at its peak since February: will this prevent a rate cut?

US core inflation rose 2.9% in July, the fastest pace in five months, the Personal Consumption Expenditures (PCE) index showed. This is the price growth indicator favored by the US Federal Reserve when making monetary policy decisions. Despite the acceleration in inflation, analysts still expect the Fed to cut the interest rate in September, but confidence in additional easing this year may be shaken.

The core PCE index, which excludes volatile food and energy prices, rose 2.9% in July on an annualized basis, the U.S. Bureau of Economic Analysis reported. This is the index's fastest rate of increase since February, with the index rising for the third consecutive month. Relative to June, the core PCE rose 0.3%. Both indicators are in line with analysts' forecasts cited by Bloomberg and MarketWatch.

"Inflation picked up from the spring as duties gradually flowed from ports to warehouses and then to store checkouts," Comerica Bank senior economist Bill Adams told MarketWatch before the statistics were released.

Inflation-adjusted consumer spending rose 0.3% in July, the best growth in four months: this shows the resilience of demand, Bloomberg noted.

Futures on the S&P 500 index were down 0.35% at the time of publication of this material, futures on the Dow Jones were losing 0.31%, and the Nasdaq 100 was down 0.6%.

U.S. government bond yields remained in positive territory after the publication of the PCE index, but were little changed from what they were before, MarketWatch noted. Yields on 30-year and 10-year bonds added about 3 basis points to about 4.91% and 4.23%, respectively, while two-years rose 1 basis point to 3.6%, FactSet data showed.

Prior to the publication of statistics, gold prices were declining, while the dollar was slightly appreciating. The day before, the cost of gold rose to $3423.16, which was the highest level since July 23, noted Reuters. Since the beginning of August, the precious metal has added 3.6% to its price.

"In addition to the slight rise in the dollar, gold is also feeling the gravitational forces that are usually seen around big, round numbers (probably referring to the publication of statistical data. - Oninvest). Markets seem reluctant to let gold deviate much from the psychological $3400 mark ahead of the PCE publication," Nemo.Money senior market analyst Han Tan told Reuters.

If the spike in inflation is no worse than expected, gold could hold above $3400, but if PCE data reduces market hopes for Fed rate easing this year, spot prices for the precious metal could fall below that mark, Tan predicted. Gold, which does not generate interest yields, usually performs well when rates are low, Reuters explained.

The PCE index is the U.S. Federal Reserve's preferred measure of inflation when making monetary policy decisions. CPI, the consumer price index, is also used to measure inflation. They rose by 2.7% year-on-year in July - exactly the same as in June and less than analysts expected.

Despite the acceleration in PCE growth, the effect of the July reading may be moderated, MarketWatch speculated. Fed Chairman Jerome Powell said in a speech last week that he is now less concerned about inflation and more concerned about the labor market: suggesting that a rate cut at the regulator's September meeting is warranted, the publication wrote. Powell should have already had good PCE estimates before his Jackson Hole speech, as they are derived from consumer and wholesale price data already released, MarketWatch explained.

But economists said higher inflation could limit the potential for additional rate cuts later in 2025, MarketWatch also warned. But about the September meeting - only a sharp spike in inflation in August - could cause the Fed to change its mind about cutting, the publication speculated.

Economists expect fourth-quarter core PCE to peak at 3.2% in the fourth quarter of 2025, a Bloomberg survey of 79 professionals showed Aug. 22-27. They believe annualized inflation will gradually decline in 2026 but remain above the Fed's 2% target.

At the same time, economists expect U.S. GDP growth to slow to 1.1% in the second half of 2025 after rising by an average of 1.4% in the first half of the year. This shows that the Fed will be under pressure from sustained price pressures and "pale" economic activity, Bloomberg noted. At the same time, survey participants rated the likelihood of a recession in the next 12 months quite low at 32%, the lowest result since March. Economists are hoping for an acceleration in business investment growth next year, the agency said.

This article was AI-translated and verified by a human editor