The June U.S. inflation report showed that the Fed's Core PCE index rose 0.3%, one of the fastest rates since the beginning of the year. The PCE index added the same amount, which was also the sharpest growth in four months. Both indicators were worse than forecasts. The market, however, did not react with a fall: the main U.S. indices rose on Thursday amid strong corporate reports.  

Details

The Core Personal Consumption Expenditures (Core PCE) index, which excludes volatile food and energy prices and is therefore the U.S. Federal Reserve's preferred inflation indicator, accelerated 0.3% in June compared to May. Это оказалось хуже ожиданий экономистов (они calculated at 0.29%) and was one of the fastest rates of the year, emphasizes Bloomberg. С учетом данных за июнь, за последние 12 месяцев Core PCE увеличился на 2,8%, в то время как экономисты ожидали 2,7%, п

The Personal Consumption Expenditures (PCE) index also added 0.3% and 2.6% year-over-year, up from 2.3% in May and the Fed's 2% target. The June increase was the sharpest in four months and also fell short of Wall Street forecasts (0.23%), notes MarketWatch. Economists had expected an annualized PCE of 2.5%, Reuters adds.

Consumer spending by Americans, which accounts for more than two-thirds of economic activity, rose slightly after a decline in May. Personal income of US residents also increased by 0.3% after an unexpected decrease in May by 0.4%.

Major U.S. stock indexes opened trading on July 31 with growth amid strong reports from Meta and Microsoft, Reuters reports. The S&P 500 added more than 0.5%, while the Nasdaq Composite jumped nearly 1%. The Dow Jones was up 0.1%. 

What does that mean

The sharp rise in inflation and almost unchanged consumer spending only emphasize the split within the Fed over the further movement of rates, notes Bloomberg. On the one hand - inflation has stopped falling, and Trump's duties are starting to put pressure on prices. On the other hand - consumption is weakening, the labor market is cooling, and this increases the risks of economic slowdown, the agency adds.

On Wednesday, the US Federal Reserve kept the interest rate unchanged for the fifth consecutive time - in the range of 4.25-4.5%. However, Federal Open Market Committee (FOMC) members were divided in their views, with two members voting against it and suggesting a quarter percentage point rate cut instead. Such a divergence happened for the first time since 1993. At the press conference after the decision, Fed Chairman Jerome Powell could not reassure investors. He emphasized that the majority of committee members believe that "moderately restrictive" monetary policy remains appropriate for now. The market regarded these comments as "hawkish", they became a "cold shower" for traders expecting monetary policy easing in September.

In addition, Powell drew attention to the effect of duties. In his opinion, the White House's trade policy is just beginning to affect prices and inflation. He has said many times before that he prefers to wait for the figures for the summer months before making any decision. Economists generally believe trade restrictions are likely to trigger a further rise in inflation later in the year, notes The Wall Street Journal.

"We think the duties will trigger inflation in the short term and deflation in the long term, but it's very difficult to understand the nature of inflation in the current environment," noted Justin Onuekwusi, chief investment officer at St. James's Place in London, in a Bloomberg statement.  

According to CME FedWatch, a tool for monitoring market expectations for the U.S. Federal Reserve rate, only 39% of traders now expect a rate cut in September. However, 47% already expect the regulator to cut it by a quarter-point at the end of its October meeting.

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

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