• Inflation remains sticky with headline PCE and core PCE at +0.2% MoM, while year-over-year rates hover near 3.7% and 3.3%, respectively.
  • Despite hotter price pressures, consumer spending and income show resilience, with personal consumption rising 3.4% in Q2.
  • Durable goods orders beat expectations, but core capital goods orders lag, suggesting some softening in business investment.

Inflation Still Running Hot

The latest batch of US economic data paints a picture of an economy that, while growing at a moderate pace, continues to grapple with stubbornly high inflation. The Federal Reserve's preferred gauge, the core Personal Consumption Expenditures (PCE) index, rose 0.2% month-over-month in June, matching consensus, but the annual rate held steady at 3.3%. Headline PCE, which includes food and energy, also rose 0.2% MoM, pushing the year-over-year figure to 3.7%, slightly above the 3.6% expected.

Even more telling, the GDP price index—the broadest measure of prices in the economy—accelerated to a 6.4% annualized pace in Q2, up from the previous 6.2%. This suggests that price pressures are not just sticky but potentially intensifying at the wholesale level, a development that could complicate the Fed's fight against inflation.

Demand Holds Up, for Now

Despite the inflation headwinds, US consumers continue to spend. Q2 GDP growth came in at a 1.5% annualized rate, in line with expectations, but the composition was notably stronger than the headline suggests. Personal consumption expenditures surged at a 3.4% clip, the fastest pace since late 2021, while personal income rose 0.4% in June, double the expected gain. Real personal spending, however, was flat month-over-month, indicating that higher prices are starting to eat into purchasing power.

Durable goods orders also surprised to the upside, climbing 1.1% in June versus the 0.5% gain forecast. But the internals were less impressive: ex-transportation orders rose a modest 0.4%, and core capital goods orders—a key proxy for business investment—increased only 0.2%, well below the 0.7% anticipated. The prior month's surge in core capital goods was revised lower to +1.7%, suggesting that the earlier strength was overstated.

Fed on Hold?

The data present a mixed picture for policymakers. On one hand, the economy is showing resilience, with consumer spending and income growth solid. On the other, inflation remains well above the Fed's 2% target, and the rise in the GDP price index could keep hawks on edge. As one analyst put it, "The Fed will likely need to see more convincing evidence of disinflation before considering any rate cuts." Market futures now price in a near-zero probability of a cut at the next meeting, with the first full quarter-point reduction fully priced for next year.

"We're in a holding pattern," said a senior economist at a major financial firm. "The data are not weak enough to force the Fed's hand, but sticky inflation means they can't declare victory yet." The central bank has repeatedly stressed that its decisions will be data-dependent, and with inflation proving stubborn, the path forward remains uncertain.

Looking Ahead

As investors parse this data, the focus will shift to the Fed's preferred inflation measure in the coming months, as well as any signs of softening in the labor market. The resilience of the consumer is a double-edged sword: while it supports growth, it also gives the Fed room to keep rates higher for longer.

Correction: The initial version of this story incorrectly stated the core capital goods orders prior reading. The prior gain was revised to +1.7%, not +0.7% as previously reported.