Article by Zhang Yaqi, Wall Street Journal
U.S. consumer spending unexpectedly stalled in July, with a mild trend in key inflation indicators, providing further data support for the Fed’s position to hold interest rates steady.
The U.S. Bureau of Economic Analysis, part of the Department of Commerce, released data on Wednesday showing that the Personal Consumption Expenditures (PCE) price index rose 0.2% month-over-month in July, exceeding the market expectation of 0.1%, while the year-over-year increase remained at 3.7%. The core PCE index, excluding food and energy, also rose 0.2% month-over-month, with the year-over-year growth rate holding steady at 3.3%, in line with market expectations. Meanwhile, real personal consumption expenditures, adjusted for inflation, were flat month-over-month, after strong gains in May and June.
The above data corroborates a series of recent economic reports, indicating that the U.S. economy showed signs of cooling in July after a strong expansion earlier in the summer. For Federal Reserve officials, this data further supports the case for pausing rate hikes; however, core PCE remains well above the Fed’s 2% policy target, and inflationary pressures have not yet fully subsided.
The market is currently shifting its focus to the annual central bank symposium in Jackson Hole, Wyoming, on Friday. Investors will closely watch Fed Chair Powell’s speech for the latest indications on how to address the current persistent inflation.
Core inflation matched expectations but remains significantly above the Fed's target.
The core PCE index rose 3.3% year-over-year in July, unchanged from June and in line with market expectations, indicating that underlying inflationary pressures are stabilizing. However, the overall PCE index, the Fed’s preferred inflation measure, still rose 3.7% year-over-year, remaining significantly above the central bank’s 2% policy target.
Breaking it down, prices for non-durable goods continued to decline in July, and lower oil prices also weighed on the energy component of PCE.
Notably, the significant increase in the cost of securities portfolio management services has become one of the structural factors driving overall price increases, closely linked to the performance of the stock market.
Nominal spending growth, with real purchasing power under pressure
In July, nominal personal consumption expenditures rose 0.2% month-over-month, and personal income increased 0.4% month-over-month, both slightly exceeding expectations.
However, real consumer spending, adjusted for inflation, remained flat month-over-month, reflecting the erosion of purchasing power due to price pressures.
The annual growth rate of income has generally slowed. Government employee wages grew by 1.4% year-over-year, the lowest since March 2021, while private sector wages slowed to 3.8% year-over-year, the lowest since March 2026.
The slowdown in income growth may be prompting consumers to become more cautious—savings rates showed a notable rebound in July, rising from a four-year low.
Jackson Hole speech becomes market focus
Against this backdrop, market attention turns to Powell’s remarks at the Jackson Hole symposium this Friday, as investors seek clarity on how the Fed will balance its monetary policy path amid persistently elevated inflation above its target.
The current PCE data, together with the previously released CPI and PPI figures, paint a picture of slowing inflation that has not yet fully subsided, providing Powell with some policy narrative flexibility. Meanwhile, another report released the same day showed that U.S. GDP growth in the second quarter matched its initial estimate, but finer details indicated stronger consumer spending, offering additional support to the economic outlook.