US Core PCE Inflation Expected to Keep Pressure on Fed Rate Hikes

The US Bureau of Economic Analysis is set to release the July Personal Consumption Expenditures (PCE) price index, with markets widely focused on whether this inflation gauge favored by the Federal Reserve will offer new guidance for its rate decisions. Independent inflation data firm Truflation projects that core PCE will rise 0.2% month-over-month in July, with the annual rate holding at 3.3%, while headline PCE is expected to remain flat year-over-year at 3.7%. The data suggests that although inflationary pressures have not escalated significantly, the path back to the Fed's 2% target remains lengthy.

**Core Inflation Shows Stickiness, Rate Hike Expectations Diverge**

Truflation noted explicitly in its report that while inflationary pressures persist, they are not sufficient to force the Fed to raise rates again this year, predicting the Fed will likely hold rates steady at its September meeting. However, market pricing paints a different picture. According to data cited by Truflation, as of its report's release, markets priced in roughly a 65% probability of holding rates steady in September, yet around 40% of expectations still point to a hike before October, with the probability of a hike before December at approximately 45%. Asset manager PGIM's chief US economist Robert Sockin took a more direct view, arguing that as long as core PCE stays above 3% for the full year, the Fed will hike rates.

**Multiple Risks Could Add Fuel to Inflation, Consumer Side Shows Weakness Signals**

Truflation highlighted four upside risk areas worth watching: tariffs have evolved into a persistent source of price resets; Middle East conflicts have pushed up transportation costs; wage growth remains at 4.0% to 4.5%; and AI-driven surging electricity demand has lifted utility costs by 7.64% year-over-year, the highest since mid-2024. These structural factors could make core inflation more sticky. However, on the consumer side, Truflation noted that July retail sales unexpectedly fell 0.6%, marking the first decline in nine months, indicating that high prices and the interest rate environment are already pressuring consumer spending, adding complexity to the economic outlook.