Fed's Preferred Inflation Gauge Hits Highest Since February, Threatens Powell's Rate Cut Bet

An inflation reading closely tracked by the Federal Reserve climbed to its highest level since February, remaining stubbornly above the 2% target and raising new doubts around the timing of Jerome Powell's anticipated interest rate cuts.

In July, the Personal Consumption Expenditures price index?the Fed's broad measure of inflation?increased 2.6% from a year earlier, right in line with Wall Street expectations.

On a month-over-month basis, it climbed 0.2%, also matching forecasts, the U.S. Bureau of Economic Analysis reported Friday.

However, the core PCE index, which excludes food and energy and is considered the Fed’s preferred inflation gauge, increased to 2.9% year-over-year, up from 2.8% in June. This marked the highest reading since February.

Monthly core PCE also stayed hot, rising 0.3%, the same pace as June.

The numbers signal that inflation remains sticky, posing a challenge for the Federal Reserve, which has opened the door to rate cuts in the coming months.

Consumer Income And Spending Keep Rising

Personal income rose $112.3 billion in July, or 0.4%, consistent with consensus forecasts. Disposable personal income, which subtracts taxes, also climbed 0.4%, a $93.9 billion increase.

Americans didn’t hesitate to spend: personal consumption expenditures jumped $108.9 billion, or 0.5%, a touch higher than June's revised 0.4%.

Personal outlays, which include consumer spending, interest payments, and transfer payments, rose by $110.9 billion.

Savings, however, edged lower: Americans saved $985.6 billion in July, down from previous months, bringing the personal saving rate to 4.4%.

Where Did Consumers Spend More?

Consumer spending saw gains across both goods and services in July. Here's where the biggest increases occurred:

• Motor vehicles and parts: +$34.9 billion
• Financial services and insurance: +$24.1 billion
• Housing and utilities: +$11 billion
• Health care: +$7.9 billion
• Food and beverages: +$9.7 billion

Some categories, however, showed weakness. Spending on food services and accommodations dropped by $12.1 billion, while gasoline and energy goods declined $1.3 billion.

Markets Set To Open Lower

U.S. stock futures moved modestly lower Friday morning as investors digested the latest inflation data.

By 8:40 a.m. ET, futures on the S&P 500 were down 0.24%, the Dow Jones Industrial Average slipped 0.21%, and the Nasdaq 100 declined 0.35%.

On Thursday, the S&P 500 index ? tracked by the Vanguard S&P 500 ETF ? closed 0.35% higher, hitting new record highs.

The U.S. dollar index edged up 0.1%, signaling some support from rising yields, while gold dipped 0.1% but stayed above the $3,400 per ounce mark.

In the bond market, Treasury yields rose slightly, with the benchmark 10-year yield increasing 3 basis points to 4.23%.

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Image created using artificial intelligence via Midjourney.