US July Core PCE Inflation Rises 3.0%, Below Expectations

Key Inflation Figures

The latest Personal Consumption Expenditures (PCE) report reveals that the core PCE index, which excludes food and energy costs, rose by 3.0% year-over-year in July, compared to expectations of 3.3%. The previous figure was also reported at 3.3%. On a monthly basis, the core PCE increased by 0.2%, aligning with prior data but below the expected 0.3%.

Consumer Spending and Income Trends

In August, consumer spending and income data showed:

• Personal Income: Increased by 0.2%, lower than the expected 0.4% (previously +0.4%).
• Personal Spending: Rose by 0.9%, exceeding the forecast of 0.8% (previously +0.2%).
• Real Personal Spending: Reported at 0.0%, the same as prior month data.

Market Reactions

These figures provide a relief for the Federal Reserve, leading to a decrease in the odds of an interest rate hike in October from 64% earlier in the week to 34%. Following the report, the US dollar dropped approximately 25 pips across the board, while Treasury yields fell by 4-5 basis points. Stocks and gold have also seen increased buying activity.

Understanding PCE

The PCE report is part of the Bureau of Economic Analysis's monthly Personal Income and Outlays release, which includes data on household income, consumer spending, and savings. The headline PCE reflects the total price changes of consumer goods and services, whereas core PCE focuses on underlying price movements by excluding volatile food and energy prices. The Federal Reserve targets a 2% inflation rate based on the headline PCE.

The PCE is often compared to the Consumer Price Index (CPI), with differences in coverage and calculation methods. While CPI mainly tracks expenses for urban consumers, PCE includes broader spending, such as healthcare costs covered by employers or government programs. Consequently, PCE can better reflect changes in consumer behavior and shifting spending patterns.

This article is for information only and is not investment advice.