Research
August 29, 2025
PCE Deflator
July PCE inflation matches expectations as overall consumer spending and income strengthen
The Personal Consumption Expenditures (PCE) deflator, the Federal Reserve’s preferred inflation gauge, rose 0.2% in July, easing slightly from the 0.3% increase in June and aligning with market expectations. Food prices edged down 0.1%, reversing the 0.3% gain seen the previous month, while energy costs fell 1.1%, marking the third decline in the past five months. Core PCE, which excludes the more volatile food and energy components, increased 0.3% in July, matching June’s pace.
On a year-over-year basis, the PCE deflator rose 2.6% for the second consecutive month. After dipping to 2.2% in April, this measure has trended slightly higher in recent months. Core inflation climbed to 2.9% year-over-year in July, the fastest annual rate since February.
Over the past 15 months—since May 2024—core inflation has averaged 2.7%, underscoring how the earlier moderation in pricing pressures has largely stalled. Still, both headline and core inflation have cooled significantly from their pandemic-era peaks of 7.1% (headline PCE in June 2022) and 5.5% (core PCE in September 2022), bringing them closer to the Fed’s 2% target.
Looking ahead, the Federal Reserve is likely to maintain a cautious stance on monetary policy, especially amid the potential for renewed price pressures stemming from higher tariffs. Nevertheless, the Federal Open Market Committee (FOMC) is expected to lower short-term interest rates at its upcoming September 17–18 meeting, as it seeks to balance its dual mandate of price stability and full employment—a move that appears increasingly likely given recent signs of softening in labor market data.
Beyond prices, personal consumption expenditures rose 0.5% in July, extending the 0.4% gain seen in June. With that said, spending on foodservices and accommodations inched down 0.1% in July following four months of increases. On a year-over-year basis, total personal spending increased has increased by a solid 4.7% over the past 12 months. Likewise, despite edging lower in July, spending on foodservices and accommodations has risen by 4.6% since May 2024.
However, part of this growth reflects higher prices. Inflation-adjusted personal consumption rose 2.1% year-over-year, while real spending on foodservices and accommodations increased 1.7%. Even when accounting for inflation, consumers are spending more on dining and travel—a positive sign for these sectors, albeit at a softer rate than we might prefer.
Personal income rose 0.4% in July, its strongest rate in 3 months. Wages and salaries grew by a healthy 0.6% in July, the best reading since November. Healthy wage growth has been a large contributor to the economy’s resilience.
Amid these trends, the personal savings rate remained at 4.4% in July for the second straight month. While the rate has risen from a cycle-low of 3.5% in December, it remains below historical norms. From 2017 to 2019, the pre-pandemic average was 6.5%. Since the start of 2023, the rate has averaged just 4.6%—suggesting that, despite monthly fluctuations, the overall trend has held steady in recent years at a level well below pre-pandemic norms.
On a year-over-year basis, the PCE deflator rose 2.6% for the second consecutive month. After dipping to 2.2% in April, this measure has trended slightly higher in recent months. Core inflation climbed to 2.9% year-over-year in July, the fastest annual rate since February.
Over the past 15 months—since May 2024—core inflation has averaged 2.7%, underscoring how the earlier moderation in pricing pressures has largely stalled. Still, both headline and core inflation have cooled significantly from their pandemic-era peaks of 7.1% (headline PCE in June 2022) and 5.5% (core PCE in September 2022), bringing them closer to the Fed’s 2% target.
Looking ahead, the Federal Reserve is likely to maintain a cautious stance on monetary policy, especially amid the potential for renewed price pressures stemming from higher tariffs. Nevertheless, the Federal Open Market Committee (FOMC) is expected to lower short-term interest rates at its upcoming September 17–18 meeting, as it seeks to balance its dual mandate of price stability and full employment—a move that appears increasingly likely given recent signs of softening in labor market data.
Beyond prices, personal consumption expenditures rose 0.5% in July, extending the 0.4% gain seen in June. With that said, spending on foodservices and accommodations inched down 0.1% in July following four months of increases. On a year-over-year basis, total personal spending increased has increased by a solid 4.7% over the past 12 months. Likewise, despite edging lower in July, spending on foodservices and accommodations has risen by 4.6% since May 2024.
However, part of this growth reflects higher prices. Inflation-adjusted personal consumption rose 2.1% year-over-year, while real spending on foodservices and accommodations increased 1.7%. Even when accounting for inflation, consumers are spending more on dining and travel—a positive sign for these sectors, albeit at a softer rate than we might prefer.
Amid these trends, the personal savings rate remained at 4.4% in July for the second straight month. While the rate has risen from a cycle-low of 3.5% in December, it remains below historical norms. From 2017 to 2019, the pre-pandemic average was 6.5%. Since the start of 2023, the rate has averaged just 4.6%—suggesting that, despite monthly fluctuations, the overall trend has held steady in recent years at a level well below pre-pandemic norms.