The path of U.S. disinflation has yet to fully reassure the Federal Reserve. Data on the central bank's favored price metric reveals that annual inflation has now remained notably above its 2% long-term objective for 65 consecutive months.
Data released by the Commerce Department on Wednesday showed the July personal consumption expenditures (PCE) price index rose 3.7% from a year earlier, matching June's pace and edging past the 3.6% consensus forecast. On a monthly basis, the index climbed 0.2%, also slightly above the 0.1% economists had projected. Stripping out volatile food and energy costs, the core PCE gauge increased 3.3% year-over-year, unchanged from the prior month, while rising 0.2% month-over-month—an acceleration from June's 0.1% uptick, both figures aligning with market expectations.
Meanwhile, consumer spending showed signs of cooling. Personal consumption expenditures grew just 0.2% in July, with real outlays essentially flat, while personal income rose 0.4%, outpacing the growth in spending.
Revised GDP data for the second quarter, also released Wednesday, underscored the economy's resilience. Real GDP held at a 1.5% annualized pace, but consumer spending growth was revised higher to 3.4% from the initial 3.2% estimate, and private domestic final purchases accelerated to a 4.2% annualized gain from a previously reported 3.9%.
With the PCE reading slightly above forecasts and core inflation refusing to decline, speculation over a potential September rate hike has intensified. According to financial media analysis, federal funds futures trading following the data release now implies roughly a 40% probability of a rate increase at the Fed's September meeting, up from approximately 36% beforehand.
As Fed Chair Warsh prepares to deliver his first major speech at Jackson Hole on Friday, market attention has shifted beyond just the September decision. Investors are now keenly focused on how Warsh will frame the persistently elevated inflation environment and what specific data points might prompt the central bank to resume its tightening cycle.
Core Inflation Shows No Sign of Easing Despite Higher-Than-Expected PCE
Looking at the monthly figures, July's PCE did not reveal an explosive inflation surge, yet the underlying issue remains a lack of further progress on the downward trend. The 3.7% year-over-year increase marks the 65th consecutive month above the Fed's 2% target, while core PCE at 3.3% also sits well above that goal. The 0.2% monthly rise in headline PCE was the largest since April, and the core gauge's 0.2% increase outpaced June's 0.1% advance.
Of particular note are the various time horizons for core PCE. Analysis from Nick Timiraos, a prominent financial journalist, breaks down the data to show that July's core PCE rose approximately 0.25% month-over-month, translating to an annualized rate of about 2.99%—nearly identical to the level seen in July 2025. The year-over-year core reading held at 3.34%, notably higher than the 2.86% recorded twelve months prior.
Examining longer windows, the three-month annualized pace of core inflation sits near 3.0%, while the six-month annualized rate has accelerated to 3.5%. This suggests that while short-term price pressures haven't spiraled out of control, the longer-term trend remains entrenched at or above 3%, keeping the distance to the 2% objective substantial.
Further decomposition reveals that core goods prices rose 0.15% month-over-month and 2.3% year-over-year, while shelter costs increased 0.26% and 3.2%, respectively. Excluding housing, core services prices climbed 0.28% for the month and 3.8% annually. The services sector deserves particular attention: while goods inflation has moderated considerably, the 3.8% annual increase in non-housing core services indicates that more persistent price pressures have yet to fully dissipate.
Wall Street Divided: Data Is Benign but Far from Comforting for the Fed
Economists at Bloomberg view the July income and spending report as signaling relatively moderate underlying inflation momentum alongside weak real consumption. Based on this assessment, they anticipate the Fed will hold rates steady for the remainder of the year.
However, concerns persist across the market. The chief economist at Regions Financial noted that while July's inflation figures appear "benign," the only issue that matters for the Fed is that inflation remains above target. Even if prices don't appear poised to accelerate further, they also show no signs of returning to the goal on their own.
Morgan Stanley Wealth Management's chief economic strategist argues that this data isn't sufficient to shift the policy balance for September, but if subsequent reports continue in the same direction, policymakers could face increased pressure to end their current wait-and-see stance. She emphasized that with investors highly sensitive to anything that could push rate expectations higher, this is not the outcome the market was hoping to see.
This encapsulates the core dilemma confronting the Fed: inflation hasn't clearly re-accelerated, but it also hasn't continued its progress toward 2%. Consumer spending is cooling, yet overall economic activity retains its resilience.
September Hike Odds Rise to Nearly 40%, Prompting Market Repricing
The market impact of the PCE data is already visible in rate expectations. Following the hotter-than-expected headline reading, federal funds futures indicated the probability of a rate hike at the Fed's September 15-16 meeting had climbed to roughly 40%, up from about 36% prior to the release. This means a relatively modest upside surprise in PCE was enough to shift market pricing by approximately four percentage points.
This doesn't suggest the market has concluded a September hike is inevitable. Rather, a 40% probability indicates that tightening remains a possible, though not yet dominant, policy option. However, compared to the earlier market narrative centered on "when will cuts begin," the question of "whether to resume hikes" has now become a serious consideration.
A strategist at TradeStation remarked that with the economy remaining strong and inflation not declining, it is "increasingly difficult" for Warsh to sidestep the rate hike question. Meanwhile, an analyst at eToro observed that inflation remains "uncomfortably high," and the market will be watching whether Warsh explains at Jackson Hole how the Fed intends to guide inflation back to its long-run target.
The latest economic data has introduced fresh variables into the Fed's policy outlook, elevating the significance of upcoming data releases and sharpening the market's focus on Warsh's Friday address.
Boston Fed President Signals Readiness for 'Soon' Hike if Inflation Improvement Stalls
Shortly after the PCE release, during Wednesday's U.S. trading session, a notable financial journalist highlighted remarks from Boston Fed President Collins, summarizing her views on inflation and monetary policy. Her speech, titled "An Economic Perspective," suggests that while the June and July inflation reports were "somewhat encouraging," if there is no evidence of "sustained improvement in inflation," then "it will be appropriate to tighten policy soon."
Importantly, the journalist noted that Collins' relatively favorable baseline inflation scenario rests on two crucial assumptions: only limited future tariff increases and some degree of reopening in the Strait of Hormuz. This implies that her "moderate improvement" outlook is not unconditionally optimistic. Should tariffs continue to push up goods prices, or if tensions in the Strait of Hormuz once again elevate energy costs, the current disinflationary trend could face headwinds. Conversely, if inflation fails to show sustained improvement, the case for resuming rate hikes could re-emerge as a central topic in Fed deliberations.
This stance directly echoes the July PCE data: even if monthly price growth isn't alarmingly rapid, as long as inflation fails to make sustained progress toward 2%, voices within the Fed calling for further tightening will not disappear.
Inflation Problem Remains Stubborn, Yet Warsh's Position Still Unclear
Following the PCE release, a major financial publication ran a commentary with the headline stating that the Fed's inflation problem remained stubborn in July. The piece opened with its core assessment: the U.S. economy retains some tailwinds but faces a lingering inflation problem—precisely the situation confronting Fed Chair Warsh ahead of his pivotal Jackson Hole speech.
The commentary highlighted that the Fed's preferred PCE gauge rose 3.7% annually in July, with core PCE up 3.3%, while the 2% target remains elusive. Meanwhile, the economy hasn't shown significant signs of stalling: second-quarter private domestic final purchases were revised up to 4.2%, July consumption grew 0.2%, and personal income rose 0.4%.
Warsh therefore faces not a simple question of whether inflation is high or low, but a more complex judgment: is the current inflation primarily driven by one-off shocks like tariffs and the Iran conflict, or is it a result of persistently strong demand and supply-demand imbalances enabling companies to keep raising prices?
The commentary concluded by highlighting the greatest source of uncertainty: Warsh's own views on the inflation he inherited remain opaque. He has not provided his individual rate expectations in the Fed's quarterly dot plot, nor has he clearly stated whether he supports a rate hike at upcoming meetings—a decision that has become a point of significant internal division at the Fed.
On the Eve of Jackson Hole: Can Warsh Offer His Own 'Inflation Answer'?
In fact, just hours before the PCE release, a prominent journalist published an article titled indicating the Fed Chair heads to Jackson Hole with an unclear inflation stance. The article argued that Warsh's primary challenge during the annual central bank symposium on Friday will be answering a rate-determining question: is the above-target inflation a temporary shock, or is the U.S. economy itself still running too hot?
If tariffs and energy shocks from the Iran conflict are merely one-off factors, the Fed need not tighten policy aggressively in response. However, if these factors are masking deeper supply-demand imbalances where demand continues to outstrip supply, inflation won't self-correct, and the Fed will need to act.
The journalist pointed out that the relatively benign price data over the past two months temporarily eased the pressure for a September hike but didn't answer another key question: whether the current policy rate of around 3.6% is sufficiently restrictive to continue pushing inflation lower.
This is precisely what makes Warsh's Friday speech so compelling. At the July FOMC meeting, three officials dissented in favor of an immediate hike, and the minutes revealed that many more policymakers were open to further tightening. With futures now pricing in approximately 40% odds of a September move, the market has begun repricing this policy path.
While July's PCE alone may not be enough to trigger an immediate September hike, it underscores the question Warsh must address on Friday: with core PCE still running at 3.3% and inflation failing to return to 2%, when and under what conditions is the Fed prepared to resume tightening?
This shifts the market's focus for Warsh's Jackson Hole remarks from simply seeking a "yes or no" on the next hike to searching for his inflation assessment, policy reaction function, and the thresholds that would trigger a September action.
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