Core PCE Inflation Runs a Touch Hot, Dimming Hopes for September Rate Cut

Federal Reserve Chair Jerome Powell. (MANDEL NGAN/AFP via Getty Images)

The Federal Reserve’s key inflation gauge ran just slightly above expectations in June, raising additional doubts about how quickly the bank will be able to lower interest rates.

The core personal consumption expenditures price index, which strips out the cost of food and energy, rose 0.3% on the month and 2.8% from a year earlier, the Bureau of Economic Analysis said Thursday. That topped FactSet estimates for a 0.29% monthly and 2.7% annual gain.

Headline PCE rose 0.3% on the month and 2.6% from a year earlier, leaving the annual metric at its highest level since February. Consensus estimates were for respective rates of 0.23% and 2.5%.

The stronger-than-expected result complicates the Fed’s path to rate cuts. When officials held interest rates steady this week, they said they wanted to see more evidence that inflation is sustainably moving toward the bank’s 2% target. This report could delay that.

“Thursday’s PCE was stronger-than-expected and throws cold water on the idea of a fall rate cut, as it’s clear that lower interest rates are not justified at this time,” said Clark Bellin, president and chief investment officer of Bellwether Wealth, in a research note. “Inflation remains sticky and justifies the Fed’s decision to keep interest rates unchanged at Wednesday’s meeting.”

Core PCE tends to move more slowly than the consumer price index, or CPI, and covers a broader range of spending.

Created with Highcharts 9.0.1Source: Commerce Department via St. Louis​FedNote: Seasonally adjusted

Created with Highcharts 9.0.1Core PCEOverall PCE2022'23'24'2512345678%

The data follow a stronger than expected second-quarter report on gross domestic product, released Wednesday. The U.S. economy grew at a 3% annualized pace, rebounding from a 0.5% contraction in the first quarter. That earlier dip was driven by a surge in imports as businesses rushed to buy in anticipation that President Donald Trump would outline heavy tariffs in his April 2 “Liberation Day” announcement. That drag faded last quarter as trade flows normalized.

With strong economic growth, the Fed’s focus remains on inflation.

Investors are now pricing in just a 39% chance of a rate cut in September, down from 47% on Wednesday and nearly 66% earlier this month, according to the CME FedWatch Tool.

“Markets have been willing to take most of the trade and tariff news in stride, as the impact had yet to show up in the economic data,” said Art Hogan, B. Riley Wealth chief market atrategist, in a note. “That changed today with the Fed’s preferred inflation gauge coming in warmer than had been expected.”

Write to Nicole Goodkind at nicole.goodkind@barrons.com.