July PCE Forecasts Show Inflation Above Fed’s Target

Key Takeaways

• The annual rate of PCE inflation is expected to be 2.6% in July, the same as in June.
• Tariffs imposed by the White House are putting upward pressure on goods prices, and services prices are also creeping higher.
• Inflation is well above the Fed’s 2% target, but markets still expect an interest rate cut in September.

Forecasts for the July Personal Consumption Expenditures Price Index report find that inflation remained elevated last month as businesses continued to adjust to new tariffs imposed by the Trump administration.

Overall, economists expect that consumer prices rose 2.6% on an annual basis and 0.2% on a monthly basis in July, according to FactSet’s consensus estimates. Excluding volatile food and energy prices, they expect prices rose 2.9% on an annual bases and 0.3% on a monthly basis.

While the rate of inflation has improved dramatically since peaking in the summer of 2022, price growth remains higher than the Federal Reserve’s 2% target for a stable economy. Morningstar senior US economist Preston Caldwell calls core inflation at 2.9% a “renewed uptrend,” noting the most recent trough of 2.5% this past April.

“Inflation is going in the wrong direction,” says Chris Hodge, head US economist at Natixis. He’s expecting roughly 0.3% core PCE growth in July and an annual growth rate of 2.9%, in line with the consensus.

Hodge believes the uneven application of tariffs over a few months means seeing the impact in monthly inflation data will be a protracted process. He doesn’t expect central bankers to be too surprised by that, since tariffs are generally considered to increase inflation, at least in the short term. “The Fed knows what the impact of tariffs are going to be, at least directionally, even if they don’t know what the magnitude is going to be,” he says.

The bigger question is whether the bump in inflation caused by tariffs is temporary or the beginning of a more pervasive shift.

July PCE Report Highlights

• PCE report release date and time: Friday, Aug. 29, at 8:30 a.m. EDT
• The PCE Price Index is forecast to have risen by 0.20% in July, down from 0.28% in June.
• Core PCE is expected to have risen 0.30% in July, up from 0.26% in June.
• Year over year, the PCE Price Index is forecast to have risen 2.6% in July, the same as in June.
• Core PCE year over year is expected to have risen 2.9% in July, up from 2.8% in June.

Goods Prices Elevated, but Keep an Eye on Services

Hodge notes that goods prices, which are typically flat or even negative from month to month, are now rising at a steady rate of 0.35-0.40 percentage points on a monthly basis. “That’s a big deal,” he says, and it “certainly puts a lot of upward pressure on consumers. He thinks that’s to be expected when it comes to tariffs: “As inventories are run down and businesses start to pass along these costs to consumers, we can expect core goods prices to stay fairly high.”

More concerning, according to Hodge, is a recent uptick in services prices. That trend was visible in last month’s Consumer Price Index report, which showed shelter costs, airline fares, and healthcare costs all rising. Inflation that bleeds over into services prices, which can be much stickier than goods prices, would be a bigger deal for the Fed, he says. “If [services prices] are staying elevated, we could be looking at a period of significantly above-target inflation.”

Markets Expect a September Rate Cut

With the Fed’s next meeting less than a month away, Wall Street is debating whether central bankers will look past elevated inflation to a weakening labor market (which would call for easing rates) or stand pat if elevated inflation proves sticky.

Fed Chair Jerome Powell acknowledged that dilemma last week in prepared remarks at Jackson Hole: “In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation.“ His conclusion was more dovish than many analysts expected. “With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” he said—a signal that a rate cut could be on the way.

Markets agree. Expectations for a rate cut in September shot higher after weak July payroll data took analysts by surprise earlier this month. As of Wednesday, bond futures markets see a roughly 88% chance of a 0.25-point interest rate cut at the Fed’s next meeting, up from a 62% chance a month ago.

But market predictions are never guaranteed, especially weeks away from a meeting. Economists from Bank of America expect inflation moving further from the Fed’s target to “challenge the market’s conviction” for a cut next month. “We expect core PCE inflation to keep trending higher and surpass the 3.0% mark later this year,” they wrote Sunday.

Hodge of Natixis says the market may be mispricing the odds. “I’m not totally convinced that we’re going to have cuts in September,” he says, putting the odds closer to 60/40. A rebound in the jobs market and inflation remaining elevated could put the Fed “in a pretty tough spot” after telegraphing a likely cut, Hodge says. He notes that the Fed’s reaction could change significantly as new economic data is released: “The market’s banking on this being a cut in September, but I think we could potentially see the Fed being more hawkish than what’s being priced into the market right now.”