US July PCE Inflation Holds at 3.7% as Spending Stalls

US inflation held at 3.7% in July while consumer spending stalled, strengthening the case for the Federal Reserve to hold rates even as price pressures stay above its 2 percent target.

The Commerce Department's Bureau of Economic Analysis said Aug. 26 that the headline personal consumption expenditures price index rose 3.7% from a year earlier, 0.1 percentage point above the 3.6% consensus, while the core gauge that excludes food and energy climbed 3.3%, matching forecasts.

On a monthly basis, headline PCE rose 0.2%, above the 0.1% expected and reversing June's 0.1% decline, while core PCE also gained 0.2%. Inflation-adjusted consumer spending was flat in July after strong gains in May and June, and personal income growth accelerated to 0.4% from 0.2%, twice the consensus. The dollar barely moved on the release, according to ActionForex.

The mixed picture leaves the Fed's policy path unresolved. Core inflation at 3.3% remains well above the central bank's 2 percent objective, yet the stall in spending suggests demand is cooling. Investors now turn to the Jackson Hole symposium Friday, where Fed Chair Warsh is expected to speak, for guidance on how officials read the data.

The July figures align with a run of recent reports pointing to a US economy that cooled after a strong early-summer expansion. The flat reading on real spending follows gains in both May and June, while the acceleration in nominal income suggests households retained some purchasing power even as inflation ran above target. The combination — firmer income but no pickup in outlays — hints that consumers are choosing to save rather than spend, a dynamic that could keep demand in check in coming months.

For the Fed, the report offers little evidence that underlying inflation is breaking higher — core readings matched forecasts exactly — but it also provides scant comfort on disinflation. The slightly hotter headline figure and firmer income data point to resilient demand alongside persistent price pressure, keeping the debate over whether to resume tightening or hold steady alive. Within the report, services prices continued to run hot while goods prices eased, a split that has characterized recent inflation data. The core services reading, which the Fed watches closely for wage-driven price pressure, remained the stickiest component, keeping the annual core rate pinned at 3.3%.

The last time core PCE held at 3.3% for consecutive months was in the first half of 2024, when the Fed kept its benchmark rate in restrictive territory for an extended stretch before beginning to ease. That precedent suggests officials may tolerate a slow grind lower in inflation rather than risk choking off growth, particularly with spending momentum fading. The market reaction was telling: the dollar barely moved, and Treasury yields showed little change, indicating traders saw the report as broadly consistent with a hold.

Markets have largely priced a pause at the next meeting, and the muted reaction to Wednesday's data suggests traders saw little in the report to shift that view. The focus now shifts to Jackson Hole, where Warsh's remarks will be parsed for any signal on how the Fed weighs sticky inflation against a softening consumer. His tone — whether he emphasizes the still-elevated core reading or the cooling demand picture — could set expectations for rate policy into the autumn.

If the data trend holds — inflation steady near 3.5 percent and spending flat — the Fed can justify holding rates while it waits for more evidence. If core inflation re-accelerates or spending rebounds sharply, the case for another hike would strengthen. Either way, Friday's speech is the next checkpoint for a market that has already priced the most likely path.

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