U.S. PCE Inflation Holds Steady in July, Core Measure Ticks Up

WASHINGTON, Aug. 29 (Reuters) - The Commerce Department reported on Friday that personal consumption expenditures (PCE) prices, the Federal Reserve’s preferred gauge of inflation, rose 0.2 percent in July and were up 2.6 percent from a year earlier, matching June’s annual pace. The core PCE price index, which excludes volatile food and energy costs, increased 0.3 percent for the month and accelerated to a 2.9 percent annual rate, the highest since February.

The report showed that monthly gains were broad-based, with services prices up 0.3 percent and goods prices rising 0.1 percent. On an annual basis, service-sector inflation outpaced goods, registering 3.6 percent compared with a 2.7 percent decline in goods prices.

Despite persistent inflation above the Fed’s 2 percent target, investors remain confident that the Federal Open Market Committee will begin cutting its benchmark interest rate at the meeting on Sept. 17. CME Group’s FedWatch tool now places an 87 percent probability on a quarter-point rate cut, up from 83 percent before the data release.

“Today’s PCE figures underscore that underlying inflation pressures remain elevated,” said Chris Rupkey, chief economist at FwdBonds. “But with consumer spending and income growth still firm, the Fed can afford to start easing policy if labor market data weaken further.”

Consumer spending rose 0.5 percent in July, supported by robust outlays on services and durable goods, while personal income climbed 0.4 percent, underpinning household resilience despite higher prices. The personal saving rate held at 4.4 percent.

Financial markets reacted modestly. U.S. stock-index futures dipped initially but recovered losses by midmorning, and 10-year Treasury yields hovered near 4.05 percent, little changed from Thursday’s close.

With tariffs continuing to feed through supply chains, Fed officials will scrutinize upcoming labor market and inflation reports for confirmation that price pressures are abating before delivering on rate-cut expectations.