Core July PCE inflation surged to 2.9% compared to last year, up from 2.8% the month before, and the highest we’ve seen in five months. The overall inflation rate stayed put at 2.6%.
The Fed has been hinting at cutting interest rates when they meet in September, but these new numbers are throwing a wrench in those plans.
When core inflation is ticking up instead of cooling down, it makes central bankers nervous.
The Commerce Department released these fresh figures, and Fed officials are poring over every detail right now. The fresh inflation numbers come in the backdrop of the Fed’s game plan around expectations of inflation reducing toward their 2% target.
July PCE inflation: Core prices rise but headline stable
The July inflation report shows consumer prices going up 0.2% from the previous month, and core inflation, the one that cuts out food and gas, climbed 0.3%.
Looking at the bigger picture, overall inflation stayed flat at 2.6% compared to last year, right where economists thought it would be. But that core number? That jumped from 2.8% in June to 2.9%, hitting the highest level we’ve seen since February.
What’s really telling is that despite all the Fed’s efforts to cool things down with higher interest rates, the price pressures just won’t quit.
The services side of things like restaurants, haircuts, that kind of stuff, looks like leveling off, but the Fed is watching it like a hawk.
Services make up such a huge chunk of what consumers spend money on that even small changes there can move the needle on overall inflation.
Fed’s dilemma: To cut rates or hold steady?
The Fed is walking a tightrope right now as the next meeting comes up on September 16-17, and Chairman Jerome Powell has been dropping hints that they might cut interest rates.
But here’s the problem: that core inflation sitting at 2.9% is way above their 2% sweet spot.
Wall Street seems pretty confident, though. Traders are betting there’s about an 83-87% chance of a quarter-point rate cut next month. They’re banking on inflation cooling down enough to give the Fed some breathing room.
Not everyone’s convinced this is smart timing. Some economists are waving red flags, saying that if the Fed cuts rates too early, it could accidentally throw gasoline on the inflation fire.
So what happens next? Everyone’s going to be glued to the upcoming jobs numbers and any new inflation data.
Those reports could totally flip the script on what the Fed decides to do. It’s one of those moments where a few data points could change everything.
Even with all the inflation worries, Americans kept spending in July.
Consumer spending jumped 0.3% after adjusting for inflation, and that’s the biggest increase we’ve seen in four months. People had more money in their pockets, and they weren’t afraid to spend it.
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