U.S. inflation holds steady above Fed target, quarterly GDP unrevised at 1.5%
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- U.S. PCE inflation held at 3.7% year-over-year in July and rose 0.2% month-over-month, with core PCE steady at 3.3% annually and climbing to 0.2% monthly — well above the Fed's 2% target for a 65th straight month.
- Fed funds futures shifted to price a 42% probability of a rate hike at the Sept. 15-16 Fed meeting after the report, up from 36% immediately before, as the above-forecast print lifted expectations of tighter policy.
- Inflation shot to a three-year high of 4.1% in May after Trump launched air strikes with Israel against Iran in late February, shutting in roughly a fifth of global oil supplies; six months later the conflict has no final resolution though oil prices have retreated.
- Federal Reserve policy has held the benchmark rate in the 3.50%-3.75% range since December, with a growing minority of officials arguing for tighter policy as inflation has remained above target since February 2021 and peaked at 7.2% in June 2022.
- Omair Sharif, founder of Inflation Insights, said the data 'supports a hike' and noted the unrounded core PCE of 0.246% amounted to a one-month annualized rate of nearly 3.0%, 'barely missed' on rounding to 0.3%.
- U.S.-Canada trade negotiations collapsed Friday, triggering new levies on US$20-billion of Canadian imports and additional retaliatory measures from both Washington and Ottawa set for coming months absent a deal.
- Q2 GDP was unrevised at 1.5% annualized, with consumer spending revised upward to 3.4% from 3.2%, signaling that the consumption driving two-thirds of U.S. economic activity held up through the first half of the year.
Why it matters: With the July core PCE annualized at nearly 3.0% and the inflation streak now at 65 months, the data hands ammunition to the Fed minority pushing for tighter policy, lifting September hike odds from 36% to 42% — meaning rate-sensitive sectors face a materially higher probability of another hike even as Q2 consumer spending was revised up to 3.4%.
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