July's PCE report shows Inflation has not been contained - but signals September rate cut

July's Personal Consumption Expenditures (PCE) report released on Friday, showcasing the reality that while the GDP continues to rise, inflation has no sign of being contained, invoking some fear among analysts.

A Zara shopper, Associated Press.

The report, released on Friday August 29th by the U.S. Bureau of Economic Analysis, shows a flat YoY of 2.6%, matching the June reading and aligning with expectations. For July MoM, the PCE index rose 0.2%, just slightly below the 0.3% increase recorded in the month of June.

However, analysts slightly feared the core PCE reading, which excludes food and energy, which tend to produce volatile results depending on unpredictable price swings. Core PCE rose 0.3%, matching June's pace. However, YoY core PCE reached its highest level since February, climbing 2.9% from the 2.8% reported in June.

These results were mostly in-line with expectations, as Investors.com believes the core PCE results to be manageable, thus supporting conditions for a Fed rate cut in September. Politico provided a similar perspective, arguing that the Fed's flexibility regarding the intersection between economic policy and economic targets. And Reuters believes that strong spending numbers could counteract rising inflation in the Fed's in interest rate policy meeting in September.

Ellen Zentner, Chief Strategist at Morgan Stanley, aligned with the viewpoints of many top analysts and media sites by reacting, "Despite this uptick [in core PCE to 2.9%], the Federal Reserve is likely to remain focused on the slowing labor market rather than inflation - strengthening the chance of a rate cut in September."

Even Northlight Asset Managements Head of Investing agreed that the PCE increase "boosts the probability of a rate cut." Markets currently bet an over 87% chance of a cut in September.

While inflation is in line, however, it shows that tariffs are not being heavily controlled, and investors responded negatively by selling some of their capital from the stock market on Friday. Particularly, it proves that Trump's recent tariffs on India, South Korea, and others are having a large, albeit more gradual, impact on inflation. But for now, economists and investors alike are optimistic that these results will open the doors even further to a rate cut in the U.S. Federal Reserve Bank.