Wall Street digested a closely watched July inflation release on Wednesday that landed roughly in line with expectations, while another report showed persistent U.S. economic growth. Together, the readings affirmed market views that the Federal Reserve is likely to keep policy rates unchanged at its September meeting, though debate over the path of policy remains active.
According to the Bureau of Economic Analysis, the U.S. core personal consumption expenditures price index - the Fed’s preferred inflation gauge - rose 0.2% month-over-month and 3.3% year-over-year in July, matching consensus forecasts. The monthly pace edged up from June, while the annual rate was unchanged.
On the headline front, overall PCE increased 0.2% M/M and 3.7% Y/Y in July, slightly above expectations. Like the core measure, the monthly reading accelerated relative to June and the year-on-year rate held steady.
Wednesday’s PCE release follows softer-than-expected consumer and producer inflation updates for July and comes ahead of a highly anticipated keynote speech by Fed Chair Kevin Warsh at the annual Jackson Hole conference on Friday. Investors said the proximity of that address keeps focus on how policymakers will interpret the latest data.
Equity markets initially reacted negatively to the inflation print: S&P 500 futures and Nasdaq 100 futures extended earlier losses, and the main averages opened lower before wavering through the session. Market participants also scanned popular exchange-traded funds that track the S&P 500 index, including the SPDR S&P 500 ETF Trust, Vanguard S&P 500 ETF, and iShares Core S&P 500 ETF.
Expert reactions
Market strategists and economists offered varied takes on the implications of July’s PCE data. Their remarks underline both the limited immediate policy implications and the lingering uncertainties policymakers face.
- Jamie Cox, managing partner at Harris Financial: "Inflation is annoyingly sticky right now, but not enough to move the Federal Reserve to hike. Given that the methodology used to calculate PCE will change next month, it’s highly likely PCE trends lower soon. Either way, the Federal Reserve isn’t hiking this year."
- Jeffrey Roach, chief economist at LPL Financial: "An inflection point may be approaching, but for now consumers continue to benefit from income growth that is outpacing inflation. Services inflation remains elevated, though there are signs of improvement. For policymakers, the balance of risks still tilts toward inflation. If geopolitical tensions ease in the near term, core inflation could fall below 3%, giving investors a reason for optimism."
- Ariane Curtis, senior North America economist at Capital Economics: "The slightly above-target-consistent rise in the core PCE deflator in July won’t be enough to convince the Fed that they’ll need to hike rates as soon as September. But with the annual rate still at 3.3% and given our relatively upbeat forecast for growth and the labour market, it remains a matter of when - not if - rates are raised. In our view, that is a 25bp hike in December, followed by another early next year."
- Joseph Brusuelas, principal and chief economist at RSM US: "The July growth, inflation, and durables data all imply an economy that is growing at a quicker pace than the trade policy distorted headline of 1.5% implies. This strongly suggests that inflation will not abate on its own back to 2% or the economy based on its own magical virtues will ease back to price stability on its own. Simply stating that one is for price stability is far different than putting in place policy to do so. This translates to further pressure on Fed Chair Kevin Warsh to further articulate his reaction function and what, if anything, he is prepared to do to restore price stability defined as the Fed’s 2% inflation target at his long-awaited policy address at the Kansas City Fed’s Jackson Hole Monetary Symposium."
- Heather Long, chief economist at Navy Federal: "The war in Iran impact is still in effect. Inflation didn’t get any better in July, according to PCE. The biggest story in the PCE data…is the consumer. Consumer fatigue is starting to show up. In July, personal consumption was only +0.2%. Once you adjust for inflation, personal consumption was FLAT. You can see consumers straining to pay the basics, especially healthcare and utilities. Meanwhile, they are cutting back everywhere they can, especially anything home or car related. There was a modest rise in personal income, but we’ll have to see if it is sustained."
- Ryan Lee, chief analyst at Bitget Research: "In-line is not the same as harmless. A core print at consensus leaves the existing policy debate largely intact and settles little, which means the market remains focused on Jackson Hole and the September (Federal Open Market Committee) debate."
- Adam Crisafulli, founder of Vital Knowledge: "The U.S. PCE was a bit anticlimactic in July...The PCE probably won’t alter the narrative a whole lot, or prompt Warsh to make revisions to his Friday speech. The PCE isn’t likely to sustainably shift the odds of a September hike above 50%, but there is a lot more data to come between now and then, including the August jobs report next Friday."
What the data means for markets and the economy
Wednesday’s release illustrated several features of the current U.S. macro landscape:
- The Fed’s favored inflation gauge edged higher on a monthly basis while the annual pace remained steady.
- Equity markets opened with losses as investors parsed inflation dynamics and the proximity of major Fed and labor market data.
- Consumer behavior is flagged as a central concern, with July’s modest nominal personal consumption gain and flat real spending suggesting potential strain on households.
Analysts emphasized the importance of upcoming events in shaping market expectations: the Jackson Hole address by Fed Chair Kevin Warsh and imminent labor market reports are likely to be focal points for investors assessing the odds of future rate moves.
Contributors
Sam Boughedda and Scott Kanowsky contributed to this article.