US Core PCE Holds at 3.3% in July, Dollar Edges Higher on Inflation Data

The US core personal consumption expenditures price index stayed flat at 3.3% year-over-year in July, matching forecasts but remaining far above the Federal Reserve’s 2% target. The dollar index climbed 0.13% to 99.03 on the data release Wednesday. Investors are now focused on Fed Chair Kevin Warsh’s speech Friday at Jackson Hole for signals on whether rate cuts or hikes lie ahead.

Core PCE misses the Fed’s inflation goal for 65 straight months

Core PCE, which excludes volatile food and energy prices, rose 0.2% month-over-month and 3.3% annually in July. This marks the 65th consecutive month the gauge has exceeded the Fed’s 2% target, a streak dating back to March 2021. Overall PCE inflation came in at 3.7% year-over-year, above the 3.6% consensus forecast. Personal income grew 0.4% while consumer spending rose 0.2%, both beating expectations.

Goldman Sachs flags stock market gains inflating the inflation number

Goldman Sachs estimates that over half of July’s 0.2% monthly core PCE increase came from rising investment portfolio management fees, not from actual price pressures. As stock markets climb, asset managers collect higher fees on larger account balances, which the Bureau of Economic Analysis counts as service price inflation. This accounting quirk means roughly 0.11 percentage points of the 0.2% monthly gain reflects equity gains rather than genuine cost increases for consumers.

BEA to revise PCE calculation in September, potentially lowering inflation readings

The Bureau of Economic Analysis will update PCE methodology on September 30, changing how it calculates portfolio management fees, legal services, and computer software prices. Goldman Sachs expects the revision to reduce core PCE year-over-year readings by roughly 0.1 to 0.2 percentage points when applied retroactively to 2021 data. The Fed will use the old methodology for its September 16 rate decision.

Market bets on September rate hike fade as Fed guidance remains unclear

Futures markets are pricing in only a 38% probability of a 25 basis point rate hike in September, down from 55% a month ago. Fed Chair Warsh has been circumspect about policy direction since taking office in May, offering little forward guidance. DBS strategists argue that Warsh must clarify how the Fed plans to anchor inflation expectations and define policy boundaries with the Treasury to reduce market uncertainty.

Final Thoughts

Core PCE’s stubborn hold at 3.3% keeps inflation well above the Fed’s goal, but Goldman Sachs data suggests the true underlying pressure is lower. Warsh’s Jackson Hole speech Friday will likely determine whether markets shift their rate expectations.

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