US core PCE inflation eases to 3.0% in July, below forecasts

• The previous reading was 3.3%
• Headline year-over-year came in at 3.4%, versus an expected 3.7% (prior was 3.7%)
• Headline month-over-month rose 0.3%, compared with a 0.4% forecast (0.2% previously)

Core PCE, which strips out food and energy:

• Core month-over-month increased 0.2%, below the 0.3% estimate
• The prior month also saw a 0.2% rise

August data on consumer spending and income:

• Personal income grew 0.2%, against a 0.4% consensus. The month before was 0.4%
• Personal spending advanced 0.9%, topping the 0.8% forecast. The prior month was 0.2%
• Real personal spending stood at %, versus 0.0% in the prior period

This provides considerable relief for the Federal Reserve and reduces the urgency for an October rate increase. The US dollar is declining across the board, while Treasury yields have dropped 4-5 basis points along the curve. Demand is emerging for stocks and gold as well.

Market expectations for an October rate hike have fallen to 34%. At the start of the week, those odds were 64%.

The US dollar has swiftly fallen by around 25 pips against major currencies.

As a backdrop, the Personal Consumption Expenditures report — commonly known as the PCE report — is part of the Bureau of Economic Analysis’s monthly Personal Income and Outlays release. It contains data on household income, consumer spending and saving, along with the PCE price index, which tracks changes in the prices of goods and services consumed within the United States. Taken together, these figures indicate how much consumers are spending and how much of that change results from higher prices rather than more purchases.

The release includes both headline and core inflation measures. Headline PCE covers all consumer goods and services, while core PCE excludes food and energy, whose prices tend to be volatile. Both are reported as monthly and annual percentage changes. The Federal Reserve defines its long-term 2% inflation target using headline PCE, but it closely tracks core PCE to gauge underlying price pressures.

PCE is often compared with the Consumer Price Index, or CPI, issued by the Bureau of Labor Statistics. Both measure consumer inflation, but their scope and calculation methods differ. CPI mainly tracks expenses paid directly by urban consumers. PCE has a wider scope, including spending on behalf of consumers, such as healthcare paid by employers or government programmes. As a result, healthcare has a larger weight in PCE, while housing plays a bigger role in CPI.

Another difference is how the indexes handle changing spending patterns. PCE updates its expenditure weights frequently and captures shifts between categories as consumers respond to price changes. CPI also accounts for some substitution, but uses a different method.

CPI is typically released earlier, giving it a prominent place in the monthly inflation calendar. PCE follows with a broader spending overview and can be revised as more data becomes available. Differences between their readings are therefore normal: they measure closely related aspects of inflation, using different coverage, weights and statistical techniques.