The Personal Consumption Expenditures price index, the inflation measure the Federal Reserve targets most closely, rose 3.7% year over year in July, up from 3.6% in June, the Commerce Department reported Wednesday, coming in a touch stronger than economists had expected. Core PCE, which strips out volatile food and energy prices and is viewed as the cleaner read on underlying inflation pressure, held at 3.3% year over year, showing no improvement from the prior month.
This is the exact data release we flagged as pivotal heading into Fed Chair Kevin Warsh’s upcoming Jackson Hole speech, and it landed on the more hawkish side of the range economists had modeled. The result directly conflicts with earlier reports that had shown consumer price inflation cooling over the prior couple of months, reinforcing just how genuinely unresolved the inflation picture remains heading into the fall.
The Fed has held its policy rate steady in a range of 3.50% to 3.75% since December. Warsh has publicly committed to bringing inflation back to target, but has offered no clear signal on whether he believes that can happen without additional rate increases, and Wednesday’s data does nothing to support the case that it will happen on its own. Heather Long, chief economist at Navy Federal Credit Union, put it bluntly, the United States still has an inflation problem, and argued the latest data buys Warsh some time to wait and assess, but that he will need to be considerably clearer about what specific conditions would actually prompt him to raise rates.
Markets moved quickly to reprice the odds. Fed funds futures now reflect roughly a 44% probability of a September rate hike, up from about 36% just before this report, and traders are now fully pricing in that the Fed will have raised its policy rate by year end.
For companies operating below the $2 billion market cap threshold, this shift in rate expectations carries direct and immediate consequences. Small and microcap businesses typically carry considerably more variable-rate debt than large cap companies, meaning every incremental increase in the probability of a Fed hike translates into a real, measurable increase in borrowing costs across this segment of the market. This report also sharpens the stakes for Warsh’s Jackson Hole address, which now arrives with markets meaningfully more convinced a hike is coming than they were just days ago, making his tone and language around this data the most consequential signal small cap investors will get before the Fed’s actual September decision.