Core PCE steady at 3.3%, Fed faces pressure as inflation stays above target

Fed leadership and inflation metrics

Kevin Warsh, who took over as Chair of the Federal Reserve in May, reportedly does not favor the Core PCE as an inflation measure, preferring a trimmed version of the Consumer Price Index (CPI) that also excludes food and energy.

Despite this preference at the top of the central bank, most market analysts and investors continue to focus on the Core PCE, as it is closely linked to official Fed policy. When the Fed refers to its 2% inflation target, it is Core PCE at the center of those statements.

This week’s unchanged Core PCE reading follows a consistent pattern, though the figure has risen from 2.6% in April last year, signaling persistent inflation pressures.

Market observers note that Core PCE has not dropped below the Fed’s target in several years, and recent data show a slight upward trend, with inflation remaining sticky well into 2026.

Comparing inflation data: CPI and PPI

Core CPI, the more broadly recognized inflation measure, recorded a 2.5% annual rise last month, matching its lowest level since April 2021. This brought a degree of optimism among investors, contributing to reduced expectations for Federal Reserve rate hikes through the end of the year.

In contrast, the Producer Price Index (PPI), which reflects wholesale inflation and often acts as a leading indicator for consumer prices, has also been closely watched. Core PPI readings have declined since April, yet the index still posted a 4.2% increase in July.

Economists suggest that when wholesale prices climb, companies may pass higher costs on to consumers, leading to reduced purchasing power, or absorb them, causing profit margins to shrink.

Mini dictionary: Core PCE (Personal Consumption Expenditures, excluding food and energy) is the US Federal Reserve’s main inflation gauge for monetary policy decisions. Core CPI (Consumer Price Index, excluding food and energy) is a widely followed measure of consumer price inflation. Core PPI tracks wholesale prices, helping forecast consumer inflation trends.

Mixed economic signals and policy uncertainty

Beyond inflation reports, recent US economic data paint a mixed picture. The past two Non-Farm Payroll reports were weaker than expected, retail sales disappointed, and leading retailers posted conflicting quarterly results.

Walmart’s most recent report reflected the slowest quarterly sales growth in six years, raising concerns over consumer spending patterns, especially among lower-income households. Other major retailers have flagged similar trends.

The latest economic developments have increased uncertainty around monetary policy, especially as Chair Warsh has scaled back the Federal Reserve’s practice of providing forward guidance to markets.

Dollar policy and global interventions

Meanwhile, US Treasury Secretary Scott Bessent has taken measures to weaken the US dollar, a move intended to benefit American exporters. Bessent recently announced a doubling of long-term government bond purchases, leading to lower yields and a softer dollar. This follows his earlier collaboration with Japan’s Ministry of Finance to support the yen in late July.

President Trump and the Treasury Department have openly favored a weaker dollar policy to boost export competitiveness. However, the impact of these interventions on currency markets and inflation remains uncertain as global economic dynamics evolve.

Some policymakers, including three out of twelve members of the Federal Open Market Committee (FOMC), cited persistent inflation pressures as the key reason for supporting a 25 basis point rate hike at the July meeting.

Investors now await next week’s Jackson Hole Economic Symposium, where Chair Warsh is set to deliver the keynote address. Markets are watching for any signals on future Federal Reserve policy direction, though Warsh’s recent approach suggests few concrete hints will be offered on rates or inflation targets.