US consumer spending stalled unexpectedly in July, while a key gauge of inflation moved in a mild direction, providing additional data support for the Federal Reserve's stance of keeping interest rates unchanged.
The Commerce Department's Bureau of Economic Analysis reported Wednesday that the Personal Consumption Expenditures (PCE) price index rose 0.2% month-on-month in July, slightly above market expectations of 0.1%, with the year-on-year increase holding steady at 3.7%. The core PCE index, which strips out food and energy, also rose 0.2% on a monthly basis, with its year-on-year pace unchanged at 3.3%, matching market consensus. Meanwhile, inflation-adjusted real personal consumption expenditures were flat month-on-month, following robust gains recorded in both May and June.
These figures align with a series of recent economic reports, indicating that the US economy, after a strong expansion in early summer, showed signs of cooling in July. For Federal Reserve officials, this batch of data further bolsters the argument for pausing rate hikes. However, core PCE remains well above the Fed's 2% policy target, suggesting inflationary pressures have not fully subsided.
Market attention now pivots to the annual central bank symposium scheduled for Friday in Jackson Hole, Wyoming. Investors will closely monitor the remarks from Fed Chair Walsh, seeking fresh insights into how he plans to tackle the currently persistent inflation.
Core inflation meets expectations but remains significantly above Fed target
The core PCE index held at 3.3% year-on-year in July, unchanged from June and in line with expectations, indicating that underlying inflationary pressures have stabilized. However, the Fed's preferred inflation measure — the headline PCE index — remains elevated at 3.7% year-on-year, still a considerable distance from the central bank's 2% policy goal.
Looking at the components, non-durable goods prices continued their downward trend in July, with lower crude oil prices also dragging the energy component of PCE lower.
Of note, a significant rise in securities portfolio management service costs emerged as one of the structural factors pushing up overall prices, showing a correlation with stock market performance.
Nominal consumption grows while real purchasing power comes under pressure
Nominal personal consumption expenditures rose 0.2% month-on-month in July, and personal income increased 0.4% month-on-month, with both figures slightly exceeding expectations.
However, after adjusting for inflation, real consumer spending was flat month-on-month, reflecting the erosion of real purchasing power by price pressures.
Income growth on an annualized basis is showing a general slowdown. Among the details, government employee wages rose 1.4% year-on-year, the lowest since March 2021; private sector wages decelerated from 4.6% to 3.8% year-on-year, marking the lowest level since March 2026.
The slowdown in income growth may be prompting consumers to become more cautious — the personal saving rate rebounded notably in July, climbing off a four-year low.
Jackson Hole speech takes center stage
Against this data backdrop, market focus shifts to Walsh's remarks at the Jackson Hole annual meeting this Friday. Investors hope to gain clarity on how the Fed will balance its monetary policy path amid inflation running persistently above target.
The current PCE data, combined with previously released CPI and PPI figures, paints a picture of inflation that is moderating but not yet fully contained, offering Walsh a certain degree of policy narrative flexibility. Meanwhile, another report released the same day showed that US second-quarter GDP growth matched the initial estimate, though the underlying details pointed to stronger consumer spending, adding a measure of support to the economic outlook.