PCE Inflation Report for July Exceeds Expectations, Raising Questions About Fed's Next Move

Key Highlights

Table of Contents

July’s PCE inflation registered 3.7% annually, exceeding the anticipated 3.6%
Core PCE remained steady at 3.3% year over year, matching June’s level
Monthly headline PCE increased 0.2%, surpassing the projected 0.1%
Federal Reserve policymakers remain split on interest rate adjustments before the Jackson Hole gathering
Fed Chairman Kevin Warsh is set to address the public Friday, though experts predict he won’t telegraph September’s rate decision

On Wednesday, the Bureau of Economic Analysis published its personal consumption expenditures price index for July. The headline PCE registered 3.7% on an annual basis, maintaining June’s rate while surpassing the 3.6% projection from economists.

BREAKING: US July PCE inflation, the Fed's preferred inflation metric, hits 3.7%, above expectations of 3.6%.

Core PCE inflation was 3.3%, the second highest reading since October 2024.

US inflation continues to run at nearly double the Fed's 2.0% target.

Own assets or be left…

— The Kobeissi Letter (@KobeissiLetter) August 26, 2026

Looking at the monthly change, headline PCE climbed 0.2%. This represented a stronger advance than the anticipated 0.1% increase and marked a notable shift from June’s 0.1% decrease.

Core PCE, which excludes food and energy prices, remained unchanged at 3.3% year over year. On a monthly basis, core inflation advanced 0.2%, ticking up modestly from June’s 0.1% but matching analyst expectations.

Wednesday also brought the second revision of second-quarter GDP, which remained at 1.5% growth, identical to the initial estimate.

New York Fed President John Williams has indicated in the past that a monthly PCE reading of 0.2% or lower would indicate inflation is trending toward the Fed’s 2% objective without additional rate increases. Wednesday’s figures just met that threshold, though by the narrowest of margins.

Central Bank Split Deepens Before Jackson Hole Gathering

These figures arrive as Federal Reserve officials convene in Jackson Hole, Wyoming for their yearly economic conference. The timing intensifies pressure on an already fractured central bank.

Boston Fed President Susan Collins indicated Tuesday that she supported maintaining current rates at the previous meeting. However, she emphasized that additional proof of declining inflation would be necessary to justify another pause.

Collins stated that absent such evidence, raising rates “soon” would be appropriate to return inflation to target within a reasonable period.

Fed Chairman Kevin Warsh, who recently assumed leadership of the central bank, is slated to deliver his inaugural major address on Friday. Market observers anticipate he will refrain from indicating the Fed’s September meeting intentions.

Two external factors are compounding the uncertainty. Energy markets remain elevated, connected to continuing conflict in the Middle East. Collins noted she is monitoring that situation carefully.

President Trump has also reignited trade disputes with Canada, with both nations preparing to implement new tariffs in September. These tariffs could elevate consumer prices, adding complexity to the Fed’s decision-making process.

The convergence of persistent inflation, geopolitical instability, and emerging trade conflicts provides hawkish Fed members with additional justification to advocate for another rate increase.

Dovish members, conversely, can reference the monthly PCE number as sufficient justification to maintain current policy.

The September gathering will represent the next critical juncture. Financial markets will scrutinize Warsh’s Friday remarks for any shift in tone, even though explicit policy guidance is not anticipated.

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