Inflation Rises, Narrowing Chances for a Fed Rate Cut

August 1, 2025 1

The latest report on inflation seems to validate the Federal Reserve’s decision to keep rates unchanged.

A day after a split Federal Reserve defied political pressure to hold interest rates steady, an inflation measure closely followed by the central bank showed prices increased 0.3% last month.

The personal consumption expenditures price index was in line with estimates for the month, although the annual rate of 2.6% was a notch higher than expected and follows May’s 2.3% rate.

The core index that omits energy and food costs also rose by 0.3% in June, but the annual rate ticked up to 2.8% from 2.7% and slightly above forecasts. Personal spending rose by 0.3%, below the 0.4% forecast but still suggesting consumers are willing to continue shopping.

The overall narrative of inflation, however, is unchanged with prices for many items continuing to rise and the levels above the 2% target set by the Fed. Analysts believe the Fed may cut at its next meeting in September, but some forecasts push that back to December. Fed Chairman Jerome Powell has said the Fed is waiting to see more clarity on how President Donald Trump’s sweeping import tariffs will affect the economy and inflation.

“Thursday’s PCE was stronger-than-expected and throws cold water on the idea of a fall rate cut, as it’s clear that lower interest rates are not justified at this time,” Clark Bellin, president and chief investment officer at Bellwether Wealth, wrote. “Inflation remains sticky and justifies the Fed’s decision to keep interest rates unchanged at Wednesday’s meeting. The current level of interest rates may be the appropriate level given where inflation is right now.”

Heather Long, chief economist at Navy Federal Credit Union, said that prices are still a major concern for consumers although incomes are holding up.

“It’s inevitable that various inflation metrics will hit 3% later this year. American consumers continue to be highly sensitive to price increases,” Long wrote in an email. “It’s telling how much consumption fell for cars and auto parts in June as consumers continue to be wary of buying cars and other big-ticket items in this environment. The good news is incomes continue to rise, and layoffs remain low.”

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Attention now turns to Friday’s monthly jobs report from the Labor Department. Forecasts call for an increase of around 110,000, down from the 147,000 recorded in June. On Wednesday, Powell described the labor market as “in balance,” but some observers believe there is an underlying slowdown occurring.

“Right now, the labor market is like a series of runners at mile 20 of a marathon,” said Cory Stahle, economist at the Indeed Hiring Lab. “Some runners are still keeping pace using old momentum, but we’re starting to see many drop off.”

“Information is showing early signs of hiring reacceleration as investment in and adoption of AI technologies grows, while the healthcare industry continues to press ahead at a solid pace,” he added. “However, other industries, like wholesale trade and financial activities, have faded over the last year. Overall, the labor market is not collapsing, but it is starting to run on tired legs.”

Stocks, meanwhile, look to resume their climb upward after strong earnings reports from market bellwethers Microsoft and Meta Platforms.

Trump announced a flurry of trade deals a day before his Aug. 1 deadline. The latest is a 15% tariff on imports from South Korea, similar to what neighbor Japan already agreed to and one announced last week with the European Union. Negotiations with China continue, with Treasury Secretary Scott Bessent saying Thursday a deal is imminent.

“The trade swings are going to keep distorting the headline growth rate through much of this year due to the evolving nature of trade policy,” said James Knightley, chief international economist at ING. “Outside of this the data remains consistent with a cooling growth story.”

Source: https://money.usnews.com/money/personal-finance/articles/inflation-rises-narrowing-chances-for-a-fed-rate-cut

Written by: Joshua Stuart

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