The Federal Reserve’s favored inflation measure, the personal consumption expenditures (PCE) price index, rose 0.2% in July, leading to an annual inflation rate of 3.7%, according to the Commerce Department. This monthly increase was slightly higher than economists expected by 0.1 percentage points. However, when excluding food and energy costs, the core PCE index also rose 0.2% month-over-month and 3.3% year-over-year, matching forecasts. Policymakers typically emphasize the core inflation figure as a more accurate reflection of long-term trends.

The report highlighted that personal income increased by 0.4%, while consumer spending grew by 0.2%, both figures surpassing economists’ projections. Interestingly, goods prices declined 0.1%, influenced by a notable 2.7% drop in gasoline and other energy-related goods and a 0.9% fall in furnishings and household equipment. On the other hand, service prices climbed 0.3%, with increases in financial services, insurance, and housing driving the rise.

Following the inflation data release, stock market futures dipped slightly, and Treasury yields rose. The inflation rate remains above the Fed’s 2% target, posing a policy challenge as the Federal Open Market Committee (FOMC) has no formal meeting until mid-September. Market expectations now assign roughly a one-in-three chance of a rate hike at that meeting, with December seen as a likelier time for policy tightening if inflation does not ease further.

Meanwhile, bond yields have climbed to their highest levels since 2007 due to investor concerns over the Fed’s commitment to controlling inflation and ongoing fiscal challenges. Treasury Secretary Scott Bessent recently announced plans to increase government debt buybacks, but skepticism remains about whether this move will significantly impact yields. Fed officials will gather this week in Jackson Hole, Wyoming, where Chairman Kevin Warsh is scheduled to deliver a key policy speech.