PCE Inflation Likely to Edge Higher in July

Key Takeaways

• Inflation is expected to rise slightly in July, as declining oil prices and fading tariff concerns could help contain broader price pressures.
• Economists expect core inflation to pick up in July.
• Markets are weighing additional economic data to gauge the path for a Fed rate hike this year.

As inflation remains elevated, the July Personal Consumption Expenditures report offers a key pulse check on the economy ahead of the Federal Reserve’s September policy meeting. The PCE Index is expected to rise from June, though economists say the broader trend points to more subdued inflationary pressures.

Economists expect overall PCE to rise 0.07% in July, according to FactSet consensus estimates, after decreasing 0.11% in June. The year-over-year number is expected to rise to 3.6%. Core PCE, which excludes volatile food and energy prices, is forecast to increase 0.18%, slightly up from June’s reading, while increasing 3.20% year over year.

The July PCE will be released on Aug. 26 at 8:30 a.m. It comes after June’s decline, the first negative inflation reading since 2020.

The Bureau of Economic Analysis is also releasing calculation changes to the PCE report that will more accurately capture price dynamics across computer hardware, stock portfolio management, and legal services. These changes will be released in September and could revise July’s numbers. This weekend, the market will also be watching Fed Chair Kevin Warsh’s comments at the annual Jackson Hole Economic Policy Symposium for clues on his inflation stance.

All things considered, market participants still await more hints about the economy’s health and whether the Fed will sway toward a rate hike this year. “Inflation expectations have held pretty steady,” says Josh Jamner, senior investment strategy analyst at ClearBridge Investments. “The pickup that we’ve seen over the last couple of months is expected to be a much shorter-term phenomenon.”

July PCE Inflation Report Highlights

• PCE report release date and time: Wednesday, Aug. 26, at 8:30 a.m. EDT
• The PCE is forecast to rise 0.07% in July after decreasing 0.11% in June.
• Core PCE is forecast to rise 0.18% in July after rising 0.13% in June.
• The PCE is forecast to rise 3.6% year over year in July after increasing 3.7% in June.
• Core PCE year over year is forecast to rise 3.2% in July after increasing 3.3% in June.

Why Core PCE Is Expected to Stay Elevated in July

Natixis chief US economist Christopher Hodge says that while there’s “no longer evidence that tariffs are impacting inflation numbers,” a few categories are still adding to core inflation. Mainly, upward price pressure from computer hardware and software tied to the AI and data center buildout continues to “bubble up.” He expects headline inflation to increase 0.14% in July, remaining up 3.70% year over year. Core inflation could rise 20%, while its year-over-year level may be 3.3%.

For months, AI’s presence in the inflation basket has slowly crept up, but not enough to muddy the overall inflation picture, according to UBS economists. As AI adoption expands across industries, software and IT costs are rising and contributing to higher core durable costs (such as computing hardware).

However, the AI category, along with financial services (which encompasses portfolio management fees) and legal services, will be calculated differently following the BEA’s methodology changes at the end of September. UBS economists expect headline PCE to increase 0.16% in July, up 3.60% year over year. They expect core PCE to rise 0.25% month over month and 3.30% year over year.

Goldman Sachs senior economist David Mericle expects core PCE to rise in July, with financial markets adding upward pressure as higher equity prices are expected to boost portfolio management fees. This might contribute 0.11 percentage points to the monthly increase. Overall, Mericle forecasts core PCE to rise 0.20% in July, or 3.24% year over year.

Fed Expected to Hold Rates Steady for Now

ClearBridge’s Jamner expects the Fed to stay on hold through September, as more economic data will roll in right before the meeting, such as the August CPI and jobs reports. “The odds are more likely that the Fed holds pat right now than anything, but it is a long time to think about some changes,” he says.

Natixis’ Hodge largely expects the Fed to hold steady at its September meeting, though given recent economic data, he still views the current market expectations for a rate hike as appropriate. “If we do get a surprising number for PCE, assuming that it’s not some sort of statistical anomaly, that would make the Fed more likely to hike in September,” he says. “I don’t think that’s going to happen. I think we’re going to get a fairly benign print.”

Bond market expectations for a September rate hike see a 59.9% chance of rates holding and a 40.1% chance of a quarter-point hike, according to the CME FedWatch Tool. Last week, expectations were at 63.9% for steady rates and 36.0% for a quarter-point hike. Meanwhile, expectations for the December meeting are more varied, with 45.1% expecting a quarter-point hike and 27.1% expecting the Fed to hold.

While most market participants expect the Fed to keep interest rates where they are, that outlook could shift based on incoming readings of inflation and labor data.