US PCE Price Index Rises to 3.7%, Complicating Fed Rate Decision

The US personal consumption expenditures (PCE) price index rose slightly in July, but still remains above the Federal Reserve's 2% inflation target. The PCE price index increased 0.2% on a seasonally adjusted monthly basis, with an annual inflation rate of 3.7%. This is higher than the Dow Jones consensus forecast by 0.1 percentage point.

However, the core PCE index, which excludes volatile food and energy prices, matched expectations. It rose 0.2% in July and 3.3% from a year earlier. The core measure is generally considered a better indicator of underlying and longer-term inflation trends.

The recent slowdown in inflation has strengthened the case among Federal Open Market Committee members who voted to leave rates unchanged in July at 3.50% to 3.75%, where they have remained since December. However, a growing minority of officials believe additional restraint could be required to ensure inflation returns sustainably to 2%.

The FOMC will next meet on September 15-16, and markets currently see only about a one-in-three probability of a move at that meeting, with December viewed as the more likely window for a potential rate increase.