Core PCE holds at 3.3% in July as inflation stays sticky

Core inflation held at 3.3% in July, defying forecasts for a slowdown and leaving the Fed's preferred gauge far above its 2% target.

U.S. core inflation held at 3.3% in July, hotter than the 3.2% economists expected, keeping the Federal Reserve's preferred price gauge well above its 2% target and complicating the case for any near-term rate cut.

"If consistent signs of inflation moderation fail to appear, it would be justified to tighten monetary policy promptly to guarantee price stability within a sensible period," Susan Collins, president of the Federal Reserve Bank of Boston, said in remarks published Tuesday.

The personal consumption expenditures price index rose 0.2% in July, leaving the annual rate at 3.7%, the Commerce Department reported Wednesday. Both readings came in 0.1 percentage point above the Dow Jones consensus. Stripping out food and energy, core PCE also rose 0.2% on the month, with the yearly rate unchanged at 3.3% rather than easing to 3.2% as forecast.

The result leaves the Fed's benchmark rate at 3.5%-3.75%, where it has sat since December, with policymakers split over whether another increase is needed. Fed Chair Kevin Warsh delivers a keynote Thursday at the central bank's Jackson Hole symposium, and the next PCE report lands Sept. 30.

Core Inflation Has Barely Moved in Four Months

The July reading interrupts the relief that June had provided. Headline PCE fell 0.1% that month as energy prices dropped, pulling the annual rate down from 4.1% in May to 3.7%. The consumer price index fell 0.4% in June, its largest monthly decline since April 2020. July reversed that pattern, with headline prices returning to monthly growth and core prices accelerating from a 0.1% monthly gain.

The underlying trend has barely moved for months. Core PCE stood at 3.3% in April, 3.4% in May, 3.3% in June and 3.3% again in July — four months of data producing almost no net improvement. Headline inflation has come down from the sharp May spike, but the distance to the Fed's goal remains substantial: headline PCE at 3.7% sits 1.7 percentage points above target, core at 3.3% is 1.3 points above it.

The report also showed household income growing faster than spending. Personal income rose 0.4% in July while personal consumption expenditures increased 0.2%, a combination that suggests consumers are rebuilding savings rather than stretching to keep up with prices. In June, income rose 0.2% and spending 0.3%.

Sticky Prices Meet a Weakening Labor Market

The Fed now faces sticky inflation alongside a softening job market. The July jobs report showed payroll employment fell by 23,000 and the unemployment rate rose to 4.1%. Higher rates can add pressure on employment, but cutting becomes harder to justify when the Fed's preferred core measure remains at 3.3%. Collins said elevated price levels are a recurring theme in her discussions with contacts throughout New England, and she warned that additional time above target could alter consumer expectations and make the 2% goal harder to reach.

Policymakers have attributed the persistent inflation to import duties imposed by the Trump administration, higher oil costs stemming from the conflict with Iran and substantial outlays on artificial intelligence. The last time core PCE held this far above target for this long, the Fed responded with a series of increases that pushed the fed funds rate to its current range.

The September meeting will hinge on the next round of employment and consumer price data. If inflation shows sustained decline, the Fed can hold. If not, Collins's warning suggests another increase is on the table. For households, the message is simpler: prices are still rising considerably faster than the Fed wants, and the rapid improvement seen in June did not continue into July.

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