PCE inflation gauge drops for first time since 2020 on Iran truce

The first decline in the Fed's preferred inflation measure since the pandemic era opens the door for a more accommodative monetary policy stance.

The Federal Reserve's preferred inflation gauge fell for the first time since the pandemic in July, with lower gasoline prices after a temporary truce with Iran pulling the index lower. The Personal Consumption Expenditures price index declined from the prior month, breaking a streak of consecutive increases that began in 2020.

"The decline is welcome, but the danger is far from over," the Bureau of Economic Analysis said in its July 30 report, noting that lower energy costs after the temporary Iran ceasefire were the primary disinflationary driver. Core PCE, which excludes food and energy, remained elevated relative to the Fed's 2% target.

The PCE index stood at 2.6% in March 2025 before the recent decline, according to Fed data. The July reading marks the first monthly drop since the pandemic-era lows of 2020, when the Fed slashed rates to near zero and inflation briefly turned negative. The central bank's target rate currently sits at 3.50% to 3.75% after three consecutive 25-basis-point cuts in late 2025.

The decline signals potential easing of inflationary pressures that could shift the Fed toward a more dovish stance. Lower inflation readings typically boost risk assets including equities, push bond yields lower and weaken the US dollar. JPMorgan has forecast GDP growth of 1.5% to 2% amid rising inflation if spending remains resilient, though the bank cautioned that Middle Eastern conflicts continue to complicate the outlook.

The temporary truce with Iran helped drive gasoline prices lower, providing immediate relief at the pump. Energy costs had been a persistent source of upward pressure on headline inflation after conflicts in the Middle East sent oil prices soaring. The predictions market is pricing in at least one rate hike before year-end, suggesting the disinflation may prove short-lived if geopolitical tensions resume.

The last time the PCE index recorded a sustained decline was during the initial months of the Covid-19 pandemic in 2020, when the Fed cut rates to zero and launched quantitative easing. That period saw inflation fall below the central bank's target for years, eventually forcing the Fed to adopt an average inflation targeting framework. The current environment differs markedly, with core inflation still running above 2% and the labor market showing resilience.

The Fed's next policy decision is scheduled for September 15-16, when the FOMC will also release its Summary of Economic Projections. Markets will be watching closely for any shift in the dot plot that reflects the new inflation data.

This article is for informational purposes only and does not constitute investment advice.