PCE inflation remains sticky as Fed weighs next move

• Key takeaway: The personal consumption expenditure index, the Federal Reserve's preferred measure of inflation, increased to 3.7% in July.
• Supporting data: Core PCE inflation, which excludes volatile food and energy prices, rose 3.3% from a year earlier.
• What's at stake: Federal funds futures contracts tracked by CME Group showed Wednesday that just under 60% of traders were pricing in no change to interest rates in September, while about 40% were betting on a rate hike in September.

WASHINGTON — The Federal Reserve's preferred measure of inflation showed little improvement in July, remaining well above the central bank's 2% target as the central bank mulls whether the time is right to raise interest rates.

The personal consumption expenditures, or PCE, price index rose 3.7% from a year earlier, according to a report released Wednesday by the Bureau of Economic Analysis. Compared with the previous month, the PCE price index increased 0.2%. 

Core PCE inflation, which excludes volatile food and energy prices, rose 3.3% from a year earlier, unchanged from June.

The PCE data largely echoed the July consumer price index report, which also showed inflation remaining elevated with only modest movement in either direction.

With inflation showing little sign of improving, market participants are split on what the Federal Open Market Committee's next move will be. Federal funds futures contracts tracked by CME Group showed Wednesday that just under 60% of traders were pricing in no change to interest rates in September, while about 40% were betting on a rate hike.

Some FOMC members, including Fed governors Lisa Cook and Christopher Waller, have publicly emphasized the upside risks to inflation in recent public comments, signaling that they could support a rate hike if inflation continues to rise. 

"If I do not see signs of continued disinflation soon, I am prepared to act," Fed Gov. Lisa Cook said in a speech in early August. "With five years of above-target inflation, the risk grows that higher inflation may become entrenched in price- and wage-setting behavior, leading to persistence that would be much harder for us to attack."

Fed Chair Kevin Warsh also said during his post-FOMC meeting news conference in July that inflation remained too high and pledged that the Fed would take steps to bring it down. He did not specify how the central bank would achieve that goal. 

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Meanwhile, an advance reading on retail sales showed activity declined 0.6% in July, according to a Census Bureau report. Retail sales totaled $763.6 billion last month, down 0.6% from June but up 5% from July 2025. Excluding spending on autos and gasoline, retail sales fell 0.2% from the previous month.

Although some recent economic data have raised concerns about the health of the broader U.S. economy, the figures were welcomed by financial markets as a sign that the Fed may be less inclined to raise interest rates next month.

The path forward for FOMC monetary policy remains uncertain, and financial markets are unlikely to get much guidance on the Fed's plans.

Fed Chair Kevin Warsh is scheduled to deliver the keynote speech Friday at the Fed's Jackson Hole Economic Policy Symposium. Fed chairs have typically used the annual event to signal the central bank's policy outlook for the remainder of the year. Warsh, however, has steadfastly avoided offering guidance that could be interpreted as a signal of the Fed's future policy decisions.