By Jeffry Bartash
Core PCE index rises to 5-month high of 2.9%
Furniture is displayed at a Cost Plus World Market store on August 12, 2025 in Greenbrae, California. Tariffs have raised prices on some products, but not as much as expected.
The numbers: A key measure of inflation rose in July at a rate that suggests persistent price pressures tied to higher U.S. tariffs, but the increase probably wasn’t big enough to dissuade the Federal Reserve from cutting interest rates next month.
The PCE index, the Fed’s preferred inflation gauge, rose 0.2% in July, the Bureau of Economic Analysis said Friday.
The Fed gives more weight to the so-called core rate of inflation. It rose a somewhat faster 0.3% in July, but that was in line with Wall Street forecasts.
The 12-month rate of inflation was unchanged at 2.6%, leaving it above the Fed’s long-run goal of 2.0%.
The yearly rate of core inflation moved up a tick to 2.9%, the highest level since February. The core rate strips out up-and-down food and energy prices and is a better predictor of future inflation.
Inflation has crept higher over the summer as the effects of stiffer tariffs have filtered into the economy.
Prices haven’t risen as much as expected, but they have gone up enough to create a split on the Fed on whether to cut interest rates.
Some top officials are still very worried about inflation. Others see emerging weakness in the labor market as a reason to cut rates, and they appear to be a majority.
Normally the Fed would not cut rates with inflation still above target, but the bank is feeling tremendous pressure from the Trump White House. A softer labor-market gives them a peg on which to justify its decision.
Big picture: The PCE index is one of three key reports the Fed will use in the runup to its September meeting to decide whether to cut rates. The other two are the August jobs report next week and the consumer price index in early September.
Most Wall Street investors widely expect a rate cut – and the July PCE report appears to have done nothing to change that view.
Market reaction: The Dow Jones Industrial Average and S&P 500 were set to decline in Friday trading. Stocks are at all-time highs.
The yield on the 10-year Treasury note (BX:TMUBMUSD10Y) was little changed at 4.23%.
-Jeffry Bartash
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08-29-25 0838ET
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