US Core PCE Inflation Surges 3.7% in Q2, Clouding Fed Rate Outlook

The US core Personal Consumption Expenditures (PCE) price index rose 3.7% in Q2, exceeding forecasts and indicating that inflation remains above the Federal Reserve's target of 2%. The increase marks an acceleration from the previous quarter's 3.2% pace, suggesting that price pressures are not cooling as quickly as policymakers had hoped.

The core PCE reading, which excludes volatile food and energy prices, is the Fed's preferred inflation gauge. Consumer spending remained resilient, but the inflation overshoot is likely to reinforce the Fed's cautious stance on interest rate cuts.

Following the data release, traders trimmed expectations for a rate cut at the Fed's September meeting, with the probability of a quarter-point cut falling to around 60% from nearly 70%. The higher inflation reading could also lead the Fed to keep rates elevated for longer, affecting mortgage rates, credit card costs, and business borrowing.