Key Data Released Ahead of Jackson Hole: U.S. July PCE Stuck at 3.7%, Q2 GDP Remains Unrevised at 1.5%, Consumer Spending Revised Upward but Stagnates in July

Zhitong Finance APP reports that the Federal Reserve’s most closely watched inflation metric—the Personal Consumption Expenditures (PCE) Price Index—unexpectedly stabilized in July. On the same day, the second estimate of U.S. second-quarter Gross Domestic Product (GDP) maintained an annualized growth rate of 1.5%, unchanged from the initial estimate, but both consumption and business investment were revised higher. However, real consumer spending in July was flat month-on-month, indicating that the economy cooled after robust growth at the beginning of the summer.

Analysts believe these data further strengthen the case for the Federal Reserve to hold rates steady for now. Although inflation has clearly retreated from its peak, it remains relatively sticky. Ongoing trade policy uncertainties and the risk of rising energy prices also contribute to the Fed’s cautious approach regarding future policy paths. Investors will closely watch Federal Reserve Chair Walsh’s speech on Friday at the Jackson Hole Global Central Banking Annual Conference for clues on how policymakers assess stubborn inflation and policy direction.

Economists Troy Durie, Andrew Sacher, and Anna Wong commented: “The main takeaway from the July personal income and spending report is that underlying inflation trends are relatively mild, while real spending is sluggish. We expect the Federal Reserve to stand pat for the rest of the year.”

Inflation Remains Sticky, Rises Moderately Month-on-Month

Data released Wednesday by the U.S. Bureau of Economic Analysis showed that the July Personal Consumption Expenditures Price Index rose 3.7% year-on-year, unchanged from June and still well above the Fed’s 2% target, and slightly higher than economists’ previous forecast of 3.6%. On a month-on-month basis, PCE increased by 0.2%, in line with market expectations, while June recorded a decline of 0.1%, the weakest reading since April 2020. The core PCE index, which excludes food and energy, rose 0.2% month-on-month and 3.3% year-on-year in July.

This index has remained above the Fed’s 2% target for 65 consecutive months since February 2021. The PCE hit a peak of 7.2% in June 2022, after which the Fed launched the most aggressive rate hikes since the 1980s, leading to a gradual decline in inflation. However, last year, after Trump returned to the White House, a new round of import tariffs pushed up prices for a wide range of goods. Subsequently, U.S. and Israel launched airstrikes against Iran, triggering a surge in energy prices and complicating the inflation picture once again.

In May this year, the annual increase in the PCE briefly rose to 4.1%, a three-year high, due to the U.S.-Iran conflict causing about one-fifth of global oil supply disruptions and sharply rising energy prices. Six months later, while the conflict remains unresolved, the fighting has subsided, and oil prices, along with broader inflationary pressures, have fallen from their spring highs.

Structurally, the moderate month-on-month rise in July inflation was driven by a 0.8% decline in real spending on core goods, while service spending rose 0.3%. The service inflation indicator, which excludes energy and housing, increased by 0.3% month-on-month—an indicator seen by some Fed officials as a key measure of domestic inflation pressure.

It is worth noting that the U.S. Bureau of Economic Analysis will adjust the pricing methodology for certain categories starting next month, including legal services, computer software, and investment consulting. Many economists anticipate that after these adjustments, core PCE readings may be revised somewhat lower, which could influence future judgments on the inflation path.

Q2 GDP Maintains 1.5%, Consumption and Investment Stronger

The second estimate of U.S. second-quarter GDP released on the same day showed inflation-adjusted annualized growth of 1.5%, in line with the initial reading and lower than the 2.1% growth rate in the first quarter. However, the underlying data were more optimistic.

Consumer spending, which accounts for over two-thirds of U.S. economic activity, grew at an annualized rate of 3.4%, up from the initial 3.2%. Nonresidential fixed investment grew by 8.5%, indicating strong corporate investment willingness. A more narrowly defined measure of underlying demand—final sales to domestic private purchasers—was revised up to 4.2% from an initial 3.9%, the strongest growth rate in more than three years. This measure excludes net exports, inventories, and government spending and is often seen as a better reflection of endogenous economic demand.

Government spending fell at an annualized rate of 1% in the second quarter, mainly reflecting a significant decline in non-defense spending. Meanwhile, the second-quarter core PCE price index’s annualized growth was revised up from 3.4% to 3.6%, indicating slightly higher inflation pressure than initially estimated for the quarter.

Real Consumer Spending Stalls in July, Savings Rate Rises to Four-Month High

Despite robust consumer spending in the second quarter, momentum noticeably weakened entering the third quarter. Data released Wednesday showed that real, inflation-adjusted consumer spending was flat in July, after strong gains in both May and June.

Nominal personal income increased by 0.4% month-on-month, with wages and salaries rising 0.3%. After adjusting for inflation, real disposable income grew 0.4%. The savings rate rose to 3%, its highest level in four months.

The stagnation in July consumer spending was partly influenced by temporary factors: Amazon (AMZN.US) moved this year’s Prime Day promotional event from July last year to June, likely pulling forward some spending and thus suppressing July spending data. However, economists remain cautious about the outlook. Average U.S. gasoline prices have returned to above $4 per gallon, possibly curbing spending on other goods and services. In addition, the extra cushion from previously higher-than-normal tax refunds may have dissipated.

Retailers including Walmart (WMT.US) stated that while price-sensitive consumers are still spending, they are more inclined to look for discounts and specialty items, with consumer behavior becoming more cautious.

Federal Reserve Policy Divisions and Rising Trade Uncertainty

The release of inflation data comes as internal debate at the Federal Reserve over the interest rate outlook intensifies. At the July Federal Open Market Committee meeting, most members voted to keep rates unchanged in the 3.50% to 3.75% range—a pause maintained since last December. The cooling of inflation over the past two months supports keeping rates steady, but the slow pace of improvement may not persuade dissenters calling for further tightening. These officials believe that since inflation has persistently run above target since February 2021, inflation cannot return to 2% without further curbing demand.

Meanwhile, new trade uncertainties are building. Last Friday, trade talks between the U.S. and its second-largest trade partner Canada broke down, triggering new tariffs on $20 billion worth of Canadian goods. Subsequently, both Washington and Ottawa announced further retaliatory measures, which will take effect over the coming months unless a deal is reached. This could introduce fresh tariff-driven price pressures, further complicating the Federal Reserve’s policy choices.

Following the data releases, U.S. Treasury yields and the dollar rose, while U.S. stock index futures retreated. Futures markets indicate the probability of a rate hike in September remains around 40%.

Currently, market attention is shifting to Fed Chair Walsh’s speech at the annual global central banking meeting in Jackson Hole, Wyoming, on Friday. Investors hope to find more signals from it on how the Fed will respond to stubborn inflation, especially as economic growth slows while price pressures persist—whether the central bank will remain patient and what possible policy adjustment paths may lie ahead.

Since taking office in May, Walsh has maintained a cautious stance on policy direction, preferring to let the market play a leading role.

But recently, U.S. government bond yields have continued to climb. Ten-year and thirty-year Treasury yields have both reached their highest levels since 2007, on the eve of the global financial crisis. This round of soaring yields has been driven by multiple factors, including waning investor confidence in the Fed’s commitment to the inflation target and concerns over debt and deficit issues in the federal budget.

Although Treasury Secretary Scott Besant announced a plan a week ago stating the Treasury would increase government bond buybacks, market participants remain skeptical whether this move will have a substantive impact on yields.