The US Bureau of Economic Analysis (BEA) is set to release its Personal Consumption Expenditures (PCE) Price Index data for July on Friday at 12:30 GMT. This key report will provide insight into inflation trends, particularly focusing on core inflation, which excludes volatile food and energy prices. This would push the core PCE inflation up to 2.9% year-over-year, up from June’s 2.8%. They forecast a 0.3% increase month-over-month. At the same time, the headline annual PCE inflation is anticipated to remain unchanged at 2.6%.
The PCE Price Index, particularly excluding food and energy, is the Federal Reserve’s preferred measure to judge how high inflation is and how consumers are spending their money. It reflects the prices of goods in the reference month compared to the previous month, allowing economists to track changes in consumer behavior and inflationary pressures. In July, analysts continued to find a tepid passthrough of tariffs into goods prices. They pointed to a step-up in the services sector.
Personal consumption is expected to increase 0.5%. This increase, primarily driven by strong underlying core retail sales, would be a dramatic game-changer to the market. In summary, if the PCE data comes in at or above 0.5% expect a strong rally in the US dollar. This may lead to downward pressure on the EUR/USD currency pair. Conversely, if it comes in lower than 0.2% (or negative), the immediate reaction could be the opposite.
Understanding the PCE Price Index
The Personal Consumption Expenditures Price Index is the broadest measure of price change for goods and services purchased by consumers. The PCE price index measures price changes for durable goods and services. It’s a sign of the times in terms of changes in consumer behavior. By measuring these changes on a month-over-month basis, the BEA does a great public service in showing Americans how inflation is eroding consumer purchasing power.
When the PCE index for July is released, it’s expected to show a headline annual inflation rate of still only 2.6%. This has huge implications for economic policy and market expectations. Core inflation continues to mesmerize economists and central banks. Since it usually stays close to the target rate of 2%, it’s a major point of interest. The core figure has been a somewhat reliable figure to help gauge long-term trends in inflation. This works to reduce optics distortions that often arise from short term price changes.
TD Securities analysts focused on the direction core prices were expected to move, writing,
“We look for core PCE prices to accelerate in July to 0.30% m/m. Headline will likely moderate to 0.22% due to weak food and energy inflation. Y/Y inflation should be 2.9% and 2.6%, respectively.”
Implications for Consumer Spending
A forecasted increase of 0.5% in personal spending suggests a strong consumer base ready to spend money. Surprisingly strong retail sales figures released this week suggest that consumers are going to spend their way through, or maybe in spite of, impending inflation. This surge in personal consumption is at the center of fueling economic recovery and continued expansion.
Notably, moderate passthrough of tariffs into goods prices suggests that some of these costs are already hitting consumers. The fact is individuals continue to spend smarter. The surge in services provides some powerful corroboration for that hypothesis. It’s pretty much proof that consumers are voting with their wallets to prioritize experiences and services over manufactured goods.
The immediate reaction from financial markets could be huge if the PCE data release, as we’ve feared, proves to be ugly. A better-than-expected print might inject a good dose of confidence back into the US economy. Such speculation will increase demand for the dollar and US assets.
Potential Market Reactions
Market analysts are watching closely to see how the next PCE data will impact currency valuations and general market sentiment. Any reading of 0.5% or more is good enough to ignite a US dollar rally. Traders will move joyously to signs of continued strength in the economy. A weaker print would raise worry about economic growth potential and create downward pressure on the dollar.
Eren Sengezer, an analyst, provided insights into potential market movements:
“The lower limit of an ascending regression channel coming from January forms an immediate support at 1.1600 before 1.1500 (100-day SMA) and 1.1400 (static level). Looking north, 1.1800 could be seen as the next resistance ahead of 1.1950.”