Inflation remained above the Federal Reserve’s 2% target in July, but it hasn’t derailed investor expectations for an interest rate cut next month.
The Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure of inflation, rose 2.6% year-over-year in July, while the core PCE index—which strips out volatile food and energy prices—came in at 2.9%, according to data from the Bureau of Economic Analysis. Both figures matched forecasts from economists surveyed by Dow Jones Newswires and The Wall Street Journal.
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Price growth overall held steady compared to June, but the core measure edged higher for the third consecutive month, underscoring persistent inflationary pressures. The Federal Reserve places greater emphasis on the core PCE when assessing progress toward its 2% inflation target.
Despite the elevated readings, markets are still anticipating a potential rate cut at the Fed’s upcoming policy meeting on September 16–17. Fed Chair Jerome Powell recently signaled a willingness to lower rates, citing signs of weakness in the labor market during a speech last week.
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Ordinarily, inflation running above target would be a signal for the central bank to maintain or even raise interest rates to cool price growth. However, economists say the Fed’s next move could hinge more heavily on labor market data due next week.
“While the Fed is likely leaning toward cutting rates to support employment, rising inflation could limit how quickly or deeply they can move,” said Bret Kenwell, an investment analyst at eToro US.
Following the release of the PCE data, traders increased their bets on a rate cut in September, with the CME Group’s FedWatch tool showing an 87% probability—up slightly from the previous day’s forecast.
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