US Inflation Rose More Than Expected — Expectations for Fed Rate Hike Strengthened

The U.S. Federal Reserve's Case for Rate Hikes Gains Some Momentum

The argument for the U.S. Federal Reserve to raise interest rates has gained some momentum following official data released Wednesday, which showed inflation in July running slightly higher than expected.

According to data from the U.S. Department of Commerce, the Personal Consumption Expenditures (PCE) price index, which the Fed uses as its primary inflation gauge, rose 3.7% annually in July, up from 3.6% recorded in June. The reading significantly exceeds the Federal Reserve's 2% target level.

Meanwhile, Core PCE, which excludes food and energy price volatility and better reflects underlying inflationary pressure, remained at 3.3% annually, identical to June's reading. This suggests that underlying inflationary pressure is not yet declining.

The Federal Reserve has maintained its monetary policy rate in the 3.50%-3.75% range since December. Fed Chair Kevin Warsh has repeatedly stated that reducing inflation above the target level is necessary, though he has not yet specified whether he considers a rate increase an essential step toward this goal.

The new data somewhat contradicts other inflation readings from recent months, which have shown a slowdown in consumer price growth.

According to Heather Long, chief economist at Navy Federal Credit Union, the U.S. still has an inflation problem. In her view, the new data still gives the Fed the opportunity to wait for additional information, though the central bank's leadership will need to more clearly explain which indicators it is monitoring and under what conditions a rate increase will be necessary.

Market expectations have also shifted. According to Fed Funds futures, the probability of an interest rate increase in September has risen to approximately 44%, compared to approximately 36% before the inflation data was released.

However, traders are virtually certain that the Fed's rate will increase at least once by year-end.