Sticky PCE inflation leaves a divided central bank ahead of Fed's Jackson Hole retreat

The Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, showed prices remained stubbornly high in July, deepening the split within the central bank over whether to hike interest rates as policymakers convened for their annual symposium in Jackson Hole, Wyoming. While year-over-year inflation remained elevated at 3.3%, month-to-month increases were modest at 0.2%, a positive sign for those advocating for keeping rates unchanged, though unlikely to pacify the more hawkish members.

The PCE index rose by 0.2% month-over-month, aligning with expectations and up from 0.1% in June, indicating inflation is gaining pace at a modest rate. New York Fed President John Williams suggested that if monthly PCE inflation stays at 0.2% or lower, it would imply the Fed no longer needs to raise rates, as it would suggest inflation is returning to the 2% target.

However, Boston Fed President Susan Collins stated she would consider raising rates soon if evidence showed inflation was decreasing, otherwise, a rate hike was warranted to hasten inflation's decline. Capital Economics economist Ariane Curtis predicted the July PCE reading wouldn't be sufficient to prompt a September rate hike, but emphasized that the annual inflation rate of 3.3% and optimistic forecasts for economic growth and employment suggest a decision on interest rates is imminent, likely in December or early next year.

Morgan Stanley Wealth Management's Ellen Zentner also doubted July's PCE data would influence the Fed's September meeting, but noted that if future data showed a similar trend, the central bank might feel compelled to act. Fed Chairman Kevin Warsh will give his maiden speech at the Jackson Hole gathering on Friday, with analysts anticipating he will refrain from hinting at the central bank's September actions, instead offering a broad perspective.

While core PCE provided a comforting signal for July, volatile energy prices remain elevated due to ongoing Middle Eastern tensions, a concern Collins is monitoring. Simultaneously, President Trump has reignited a trade war with Canada, threatening fresh tariffs starting in September, potentially reigniting inflationary pressures.