Fed's preferred inflation indicator PCE slightly higher than expected, core PCE "remains elevated," September rate hike uncertainty makes Waller's Friday speech more compelling

The process of cooling inflation in the US has yet to fully reassure the Federal Reserve. The Fed’s preferred gauge shows that the annualized inflation level has remained significantly above its long-term target of 2% for 65 consecutive months.

According to data released by the US Department of Commerce on Wednesday, July 26 local time, the Personal Consumption Expenditures (PCE) price index increased by 3.7% year-on-year in July, matching June’s rate and higher than market expectations of 3.6%. The index rose 0.2% month-on-month, also beating the expected 0.1%. Excluding food and energy, core PCE increased by 3.3% year-on-year, the same as in June, and rose 0.2% month-on-month, up from 0.1% in June, both in line with market forecasts.

Meanwhile, consumption growth showed signs of slowing. Personal consumption expenditures in July rose just 0.2% month-on-month, and real personal spending was basically flat; personal income increased by 0.4%, outpacing consumption growth.

Revised Q2 GDP data released Wednesday also showed the US economy remains resilient, with real GDP growing at an annualized rate of 1.5%. Consumption growth for the quarter was revised up from an initial 3.2% to 3.4%, while private domestic final purchases were revised up from 3.9% to 4.2%.

The slightly higher-than-expected PCE and persistently “sticky” core PCE inflation have reignited market suspense over a possible rate hike in September. The media reported that after the July PCE data release, the probability of a rate hike at the September Federal Reserve meeting, as reflected by fed funds futures, rose to about 40%, up from around 36% before the data.

With Fed Chair Walsh set to deliver his first major speech in office at Jackson Hole this Friday, market focus now extends beyond whether rates will rise in September—it also centers on how Walsh will explain the current stubborn inflation and what data might prompt the Fed to restart hikes.

PCE Slightly Exceeds Expectations, But Core Inflation Remains Stubbornly High

In terms of month-on-month data, July’s PCE did not show a particularly strong inflation rebound, but the core issue is that the downward inflation trend still lacks further progress.

July PCE rose 3.7% year-on-year, exceeding the Fed’s 2% target for the 65th consecutive month; core PCE was up 3.3% year-on-year, also far above the goal. The monthly PCE increase was 0.2%, marking the largest monthly gain since April, while core PCE’s 0.2% monthly rise surpassed June’s 0.1%.

Of particular interest are the different time windows for core PCE.

Nick Timiraos, chief economics reporter at The Wall Street Journal—often dubbed the “New Fed Whisperer”—broke down the data on social media, noting that July core PCE was up roughly 0.25% month-on-month, annualized at around 2.99%, similar to July 2025; the year-on-year core PCE increase was 3.34%, clearly higher than July 2025’s 2.86%.

Viewed over longer time frames, the three-month annualized growth rate for core PCE is about 3.0%, with the six-month annualized rate rising to 3.5%.

In other words, short-term inflation is not obviously out of control, but on a longer horizon, core inflation remains around or above 3%, still well above the 2% target.

Timiraos further detailed that July core goods prices rose 0.15% month-on-month and 2.3% year-on-year; housing prices rose 0.26% month-on-month and 3.2% year-on-year; excluding housing, core services prices increased 0.28% month-on-month and 3.8% year-on-year.

Of these, core services merit particular attention. While goods inflation has moderated, year-on-year prices for core non-housing services still rose 3.8%, indicating that more persistent inflationary pressures have not fully subsided.

Wall Street Divided: Data Mild, But Not Enough to Satisfy the Fed

Bloomberg economists Troy Durie, Andrew Sacher, and Anna Wong believe that the primary takeaway from the July personal income and spending report is that underlying inflation remains mild while actual consumption is relatively weak. Based on this judgment, they expect the Fed to keep rates unchanged for the rest of the year.

But there is market concern.

Regions Financial chief economist Richard Moody pointed out that although July’s inflation readings were “mild,” for the Fed the only issue is that inflation remains above target; even if inflation does not accelerate further, it is not expected to fall back to goal either.

According to Morgan Stanley Wealth Management chief US economist Ellen Zentner, this set of data is not enough to alter the Fed’s policy balance for the September meeting, but if subsequent data continue in the same direction, policymakers could face increasing pressure to end their current wait-and-see attitude.

Zentner noted that, as investors remain highly sensitive to anything that could lift rate expectations, the latest economic data were not what the market hoped to see.

This forms the core contradiction for current Fed policy: Inflation has not obviously reaccelerated, but neither is it converging toward the 2% target; consumption has cooled, but economic activity remains resilient.

September Hike Odds Rise to 40%; Market Starts to Reprice

PCE data’s direct market impact is already reflected in rate expectations.

Reuters reported that, after headline PCE in July exceeded expectations, fed funds futures pricing shows the probability of a Fed rate hike at the September 15–16 meeting at approximately 40%, up from about 36% before the data.

In other words, a PCE “beat” that is not extreme has already led to a roughly 4 percentage point rise in the market-implied probability of a September rate hike.

This does not mean that the market sees a September hike as a certainty. On the contrary, a 40% probability means a hike is still only a non-dominant policy option.

But in contrast to the prior market focus on “when to ease,” the question of “whether to resume hikes” is now back on the agenda.

TradeStation strategist David Russell said that with the economy staying strong and inflation not dropping, it is “harder and harder for Walsh to avoid the rate hike debate.” eToro’s Bret Kenwell also commented that inflation “remains uncomfortably high,” and markets will watch to see if Walsh will explain at Jackson Hole how the Fed plans to bring inflation back to its long-term target.

Reuters summarized the day’s economic data with a key takeaway: The latest numbers add new variables for the Fed’s policy outlook, increase the importance of incoming economic data, and further raise the profile of Walsh’s Friday Jackson Hole speech.

Timiraos Shares Collins’s Speech: If Inflation Doesn’t Improve Further, “Soon” Appropriate to Hike

After the PCE data release and during Wednesday’s early US trading session, Timiraos shared the Boston Fed’s recent official transcript of President Collins’s speech, which summarizes her views on inflation and monetary policy. The Boston Fed’s website shows the speech was entitled “Perspectives on the Economy.”

Timiraos summarized that Collins believes the June and July inflation reports are “somewhat encouraging,” but absent “evidence of sustained improvement in inflation,” it would be “appropriate to tighten (monetary) policy soon.”

Of note, Timiraos specifically pointed out that Collins’s relatively upbeat inflation scenario relies on two key assumptions: Future tariff increases remain limited, and some reopening of the Strait of Hormuz occurs.

This means Collins’s “mild improvement” is not an unconditional optimism.

If tariffs further push up goods prices or if tensions in the Strait of Hormuz reignite energy prices, current progress on inflation could be set back; and if inflation fails to exhibit “sustained improvement,” rate hikes may return to focus in Fed policy discussions.

This stance directly resonates with the July PCE data: Even if monthly inflation is not surging, as long as inflation cannot consistently approach 2%, calls within the Fed to tighten policy further will not go away.

The Wall Street Journal Highlights “Stubborn Inflation Problem,” Walsh’s Position Remains Unclear

Following the release of PCE data, The Wall Street Journal published a special commentary headlined: “The Fed’s Inflation Problem Remains Stubborn in July.”

The article makes its main point at the outset: The US economy still benefits from some tailwinds, but simultaneously faces a persistent inflation issue—precisely the challenge facing Fed Chair Walsh ahead of his major Jackson Hole speech on Friday.

The WSJ notes that the Fed’s favored PCE price index rose 3.7% y/y in July, with the core PCE up 3.3%, leaving the 2% inflation goal far from reach. At the same time, the US economy hasn’t obviously stalled: Q2 private domestic final purchases growth was revised to 4.2%, July consumption rose 0.2%, and personal income grew by 0.4%.

Thus, the problem facing Walsh is not simply whether inflation is high or low, but rather a more nuanced judgment: Is current inflation primarily a result of one-off shocks like tariffs and the Iran war, or is robust demand and supply-demand imbalance enabling sustained pricing power for businesses?

The final point in the WSJ commentary is precisely the greatest uncertainty introduced by Walsh himself: It remains unclear how Walsh views the inflation problem he inherited. He has not provided his own rate forecast on the Fed’s quarterly dot plot, nor has he stated explicitly whether he supports rate hikes at future meetings—exactly the issue on which there is now significant divergence within the Fed.

On the Eve of Jackson Hole: Can Walsh Provide His Own “Inflation Answer”?

In fact, hours before the PCE release, Timiraos published an article entitled “Fed Chair Heads to Jackson Hole—with Inflation Stance Unclear.”

The article argues that, at the Jackson Hole central bank symposium this Friday, the greatest pressure on Walsh will be to answer a question that could determine the direction of rates: Is currently above-target inflation simply due to temporary shocks, or is the US economy still overheating?

If factors like tariffs and energy shocks from the Iran conflict are just one-offs, the Fed need not significantly tighten policy to address short-term disruptions; but if these factors are masking deeper supply-demand imbalances, and demand still outstrips supply, then inflation will not abate on its own and the Fed will have to act.

Timiraos notes that the relatively mild price data over the past two months have temporarily eased pressure for a September Fed hike, but haven’t answered a key question: Is the current policy rate of about 3.6% restrictive enough to further push down inflation?

This is the real focus of Walsh’s Friday speech.

At the July FOMC meeting, three officials dissented by voting for a rate hike rather than holding steady; minutes showed more at the Fed open to further tightening. After the PCE data, futures markets raised the implied odds of a September hike to roughly 40%, suggesting the market is repricing this policy path.

Therefore, while July PCE alone may not force the Fed to hike in September, it reinforces the key issue Walsh must address Friday: With year-on-year core PCE still as high as 3.3% and inflation unable to sustainably return to 2%, when and under what conditions is the Fed prepared to tighten policy again?

This has shifted market focus for Walsh’s Jackson Hole speech from merely seeking a “hike or not” answer to examining his inflation outlook, policy reaction function, and the September decision threshold.