InvestIndependently confirmed3 publishers3 min readPublished Updated
Core PCE stalls at 3.35%, and the September cut nobody is pricing
Core services and a sudden run-up in computer prices are holding the Fed's preferred gauge 1.35 points above target. Futures put the September choice at hold or hike.
The Investor · Invest desk
What happened
- July core PCE came in at 3.35% year over year, unchanged from June, capping the four worst months since October 2023.
- Core services rose 3.7% over the year, with May through July the hottest readings since February 2025.
- An advance retail sales reading showed activity down 0.6% in July.
Why it matters
- constraint Two percent is arithmetically out of reach while the largest block of household spending contributes more than two full percentage points by itself; the rest of the basket would have to deflate to...
- decision September has become a choice between standing still and tightening.
- exposure The AI capital cycle now shows up inside the Fed's own target variable, via retail hardware and software prices, so households are carrying part of the buildout and the central bank has to respond...
- contradiction Markets took July as reducing hike risk while a sitting governor said she is ready to act on the absence of disinflation. Both cannot be describing the same September meeting.
Start with the weight. Over 60% of consumer spending goes to core services, a bucket that includes rent, healthcare, insurance, transportation services and subscriptions [8], and that bucket ran 3.7% above a year ago in July [7]. Multiply the share by the rate and core services alone deliver roughly 2.2 percentage points of consumer price growth [24], more than the Fed's entire target. Printing 2% on core PCE therefore requires almost everything else to be flat or falling. It is not. Durable goods rose 0.37% in the month, an annualized 4.6%, and 3.4% over the year [14].
Wolf Richter's explanation for the services stickiness is a pricing-power argument rather than a demand argument: many core services either lack the competition consumers can leverage or cannot be shopped around at all, healthcare being the obvious case, so firms that believe they can raise prices do [13]. That is not a category that responds quickly to a policy rate.
The newer line item is the one worth watching. The PCE index for information processing equipment, meaning computers, tablets, accessories and software, rose 1.4% in July, 15.5% over the year, and 22% across the eight months since the break began in December [9]. Compounded, that eight-month run is about a 34.8% annual pace [25]. Richter attributes it to the AI boom reaching consumers directly [9], and the mechanism looks like the one already visible in jewelry and watches, up 14.8% year over year as multi-year gold prices get passed through [15]. Upstream cost, retail price, core index.
The result is a Fed pinned by its own yardstick. Core PCE has been above 2% since March 2021, bottomed at 2.6% in April 2025, and has moved away ever since [6], which puts July 0.75 points above the low [23] and 1.35 points above target [22]. Federal funds futures tracked by CME Group had just under 60% of traders pricing no change in September and about 40% pricing a hike [17]. Those two add to essentially the whole distribution, leaving no meaningful probability on a cut [20]. The easing debate is not being lost. It is not being held.
What American Banker reported as the market's consolation was an advance retail sales reading down 0.6% in July [19], welcomed as a sign the Fed may be less inclined to raise rates next month [12]. Note what that argument rests on: weaker spending, not better prices. Governor Lisa Cook, meanwhile, said that if she does not see signs of continued disinflation soon, she is prepared to act [18].
One small discrepancy is worth flagging for anyone modelling off headlines. American Banker put core at 3.3%, unchanged from June [5]; Wolf Street put it at 3.35%, also unchanged [4]. The half-tick is rounding [21], but it is the difference between a number that reads as drifting toward 3% and one that reads as parked. The monthly data says parked: 0.25% in July, a 3.0% annualized pace [3]. And the households doing the paying do not get the Fed's privilege of looking through energy, still up 15.3% over the year with gasoline up 25% [10].
What to watch
- Whether Warsh uses the Jackson Hole keynote to confirm or kill the roughly 40% hike pricing for September.
- Whether information processing equipment prices keep climbing past the eight-month, 22% run, or the pass-through stalls.
- Whether the July retail sales decline extends, setting softening demand against 3.7% core services in the September decision.
Clarity's read
What the record supports and how the coverage leans. The claims behind it follow.
Reality
- Evidence78
- Adoption
- Insufficient
- Hype gap+10
- Incentives
- Insufficient
- Confidence74
Perspective Coverage
3 publishers- Builder
- Builder 10%
- Operator
- Operator 32%
- Investor
- Investor 58%
Claim ledger
Ranked by verification strength, evidence, and original report placement.
- [1]
The all-items PCE price index rose 0.16% in July from June (1.9% annualized) and 3.7% year over year, the same as in June.
- [2]
The Bureau of Economic Analysis report released Wednesday showed the PCE price index up 3.7% from a year earlier and 0.2% from the previous month.
- [3]
The core PCE price index rose 0.25% in July from June, a 3.0% annualized rate.
- [4]
Core PCE rose 3.35% year over year in July, the same increase as in June; the last four months produced the worst increases since October 2023.
- [5]
American Banker reported core PCE inflation, which excludes food and energy, rose 3.3% from a year earlier, unchanged from June.
- [6]
Core PCE has been above the Fed's 2% target since March 2021, bottomed at 2.6% in April 2025, and has been moving further from the target ever since.
- [7]
The core services PCE price index rose 0.27% in July from June (3.3% annualized) and 3.7% year over year; May, June and July were the worst increases since February 2025.
- [8]
Core services account for over 60% of consumer spending and include rent, healthcare, travel, lodging, transportation services, insurance of all kinds, auto repair, subscriptions and financial services.
- [9]
The PCE index for information processing equipment (computers, tablets, accessories, software) rose 1.4% month over month (18% annualized) and 15.5% year over year, having spiked 22% over the past eight months after starting suddenly in December; Wolf Richter attributes this to AI exacting its pound of flesh directly from consumers.
- [10]
The energy PCE price index fell 1.5% in July from June, a second consecutive monthly decline, but was still up 15.3% year over year, with gasoline up 25% from a year ago.
- [11]
Fed Chair Kevin Warsh is scheduled to deliver the keynote speech Friday at the Fed's Jackson Hole Economic Policy Symposium, an event chairs have typically used to signal policy for the rest of the year.
- [12]
American Banker reported that financial markets welcomed the figures as a sign the Fed may be less inclined to raise interest rates next month.
- [13]
Wolf Richter argues core services inflation is hard to battle because many such services lack adequate competition consumers can leverage or are difficult or impossible to shop around, such as healthcare, so companies confident they can raise prices without losing customers do so.
- [14]
The durable goods PCE price index rose 0.37% in July from June (4.6% annualized) and 3.4% year over year.
- [15]
Jewelry and watches rose 2.0% month over month (27% annualized) and 14.8% year over year as the years-long spike in gold prices is gradually passed on to consumers.
- [16]
Food prices edged down in July but the index was up 2.40% year over year, the highest in three months.
- [17]
Federal funds futures tracked by CME Group showed Wednesday that just under 60% of traders were pricing no change to interest rates in September, while about 40% were betting on a September rate hike.
- [18]
Fed Governor Lisa Cook said, "If I do not see signs of continued disinflation soon, I am prepared to act."
- [19]
An advance reading on retail sales showed activity declined 0.6% in July.
- [20]
The reported September futures pricing of just under 60% hold plus about 40% hike accounts for essentially the entire distribution, leaving no meaningful probability priced for a September cut.
- [21]
The gap between the 3.3% core PCE figure reported by American Banker and the 3.35% reported by Wolf Street is a rounding difference, not a data conflict; both describe July as unchanged from June.
- [22]
July core PCE of 3.35% is 1.35 percentage points above the Fed's 2% target.
- [23]
Core PCE is 0.75 percentage points above its April 2025 low of 2.6%.
- [24]
On a 60% spending share and a 3.7% annual rate, core services alone contribute about 2.2 percentage points of consumer price growth, more than the Fed's whole 2% target.
- [25]
A 22% rise over eight months in information processing equipment prices is about a 34.8% annualized pace.
Sources
3 independent publishers whose own reporting we read for this story.
- americanbanker.comPCE inflation remains sticky as Fed weighs next move
1 article · August 26, 2026
- thedailyupside.comSticky Inflation Report Raises Jackson Hole Stakes for Fed’s Warsh
1 article · August 26, 2026
- wolfstreet.comInflation Refuses to Go Back into the Bottle: Fed-Favored PCE Price Index
1 article · August 26, 2026
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- PCE Price IndexFollow
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- CME GroupFollow
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