Truflation's preliminary forecast for the July Personal Consumption Expenditures price index indicates persistent underlying inflation pressures, though not at a level the firm believes will compel the Federal Reserve to hike interest rates before year-end. The Bureau of Economic Analysis will publish the official July PCE on Wednesday.
According to Truflation's estimate, headline PCE is set to remain at 3.7% on a year-over-year basis, with a monthly change of 0.19%. Core PCE, which excludes food and energy, is projected to increase 0.2% month over month, leaving the annual core rate at 3.3%.
In its monthly analysis, Truflation said its outlook differs from some market expectations. The firm maintains that the Fed is likely to leave the policy rate unchanged at the September meeting and does not expect any rate hikes through the remainder of the year.
Market-derived probabilities differ from Truflation's outlook. Current pricing places about a 65% chance of a rate hold in September, with roughly a 40% probability of a hike by October and about a 45% chance of a hike by December.
Drivers and category details
Truflation highlighted four specific sources of mounting concern that could keep upward pressure on prices:
- Tariffs turning into a recurring source of price resets rather than a single, one-time adjustment.
- The Middle East conflict contributing to higher costs for jet fuel, freight and broader transport expenses.
- Wage growth remaining elevated, running in a 4.0% to 4.5% range.
- Rising electricity demand tied to artificial intelligence applications, with utilities costs up 7.64% year over year - the highest increase noted since mid-2024.
Breaking down category-level movements, Truflation's data show transportation services up 12.25% year over year, and food services and accommodations up 3.61%. On a monthly basis, gasoline prices declined 3.36%.
Consumer demand and retail signaling
On the consumer front, Truflation pointed to an unexpected 0.6% decline in retail sales in July, the first monthly drop after nine months of gains. The firm said that major retailers have reported signs of shoppers becoming more selective and cautious.
Specifically, Truflation noted comments from large chains such as Walmart and Lowe's, and highlighted that Walmart recorded its slowest sales growth in six years. The report interpreted these developments as an indication that middle- and lower-income households are trimming spending as inflation and higher fuel costs weigh on disposable income.
The combination of steady headline inflation, modest monthly gains in core prices, and the set of flagged risks frames Truflation's view that while inflation remains a concern, it does not, in their assessment, necessitate further tightening from the Fed within the current calendar year.