Personal Consumption Expenditures (PCE) – Market Update
The Fed’s preferred inflation gauge, PCE, came in right on target for July. Headline inflation rose 0.2% month-over-month and held steady at 2.6% year-over-year, matching expectations.
The Core rate—which strips out food and energy and is the Fed’s main focus—also rose 0.3% monthly and ticked higher from 2.8% to 2.9% annually, but this was fully anticipated by markets.
Looking under the hood:
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The 3-month Core run rate moved up from 2.52% to 2.94%, likely elevated by temporary tariff effects.
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The 6-month run rate eased from 3.09% to 2.95%. Both measures are trending lower than February’s peaks, showing longer-term progress.
One distortion in the data was Portfolio Management costs, which rose 5.4% and artificially added 0.1% to inflation. This isn’t true inflation—it simply reflects higher dollar-based fees on larger portfolios as asset prices climbed.
Shelter was more moderate, up 0.27% in July and 4% annually. Rent rose 0.26% and Owners’ Equivalent Rent rose 0.28%. Real-time rent data suggests inflation here is overstated by about 0.2%, meaning Core PCE is closer to 2.7% than reported.
Personal Income rose 0.4% and Spending rose 0.5%, both right in line with estimates.
Bottom line: The bond market took the report in stride. Despite Core PCE inching up year-over-year, the move was expected given tariffs. Importantly, this release should not alter expectations for a September 17 Fed rate cut.
Fed Governor Waller’s Comments
Fed Governor Christopher Waller—one of the leading candidates for the next Fed Chair—gave a notable speech on labor, inflation, and monetary policy. Key takeaways:
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He expects negative revisions to jobs data, with May–July likely showing outright job losses after adjustments.
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Labor demand is softer, but so is labor supply. While fewer jobs are needed to keep unemployment stable, Waller noted we’ve never seen the “breakeven” turn negative—until now.
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The quit rate is at its lowest since 2010, and businesses report delaying hiring due to tariff uncertainty, AI disruption, and softer demand. Teen unemployment is also rising.
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He highlighted survey response delays, which cause larger revisions. This doesn’t make the data less reliable, but it does explain why revisions have been so meaningful lately.
On inflation, Waller believes that once tariffs are stripped out, inflation is running close to the Fed’s 2% target.
He also sees the neutral Fed Funds rate at 3%, meaning today’s 4.375% level is still restrictive by 1.375%. This gives the Fed plenty of room to cut while maintaining a cautious stance.
Waller supported a rate cut in July and is even more confident about cutting on September 17—favoring a 25bp move rather than 50bp. With Polymarket showing him as the current frontrunner for the next Fed Chair at 34%, his views carry weight. Given his deep understanding of economic data, Waller would be a strong candidate.