Key facts
- Annual U.S. inflation held steady at 3.7% in July, unchanged from June.
- The Personal Consumption Expenditures Price Index (PCE) is the Federal Reserve's preferred inflation gauge.
- Core PCE inflation was 3.3% year-over-year in July, unchanged from June.
- Fed funds futures now reflect a 44% probability of a September rate hike, up from 36% prior.
- Traders are fully convinced the Fed will have raised rates by the end of the year.
Annual U.S. inflation held steady at 3.7% in July, remaining above the Federal Reserve's 2% target. The Personal Consumption Expenditures Price Index (PCE), the Fed's preferred inflation gauge, showed no change from the previous month, with core PCE also holding steady at 3.3%. This persistent inflation complicates the Federal Reserve's decision on interest rates.
Fed funds futures now reflect a 44% probability of a September rate hike, an increase from 36% before the data release, and traders are fully convinced that rates will be higher by year-end. Fed Chairman Kevin Warsh has vowed to address above-target inflation but has not indicated whether rate hikes are necessary.
Energy prices, influenced by geopolitical events, are a significant factor in current inflation levels. While energy prices have retreated from earlier highs, their impact persists. Separately, second-quarter annualized GDP growth was confirmed at 1.5%.