Markets Weigh Inflation Climb as Fed Rate Cut Odds Hold Strong

The U.S. core personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, increased to 2.9% year-over-year in July 2025, up from 2.8% in June and marking the highest level since November 2023 [3]. The monthly rise stood at 0.3%, matching the previous month’s increase [3]. This data aligns with market expectations and signals a slight uptick in inflationary pressures, although not a significant deviation from the Federal Reserve’s current policy trajectory.

Markets responded cautiously to the data, with equities showing mixed performance. The S&P 500, which had previously reached record highs, fell nearly 1% on Friday, as tech shares—particularly those of large-cap companies—experienced a pullback following a strong rally from April’s market slump. Meanwhile, the Nasdaq 100 declined 1.3%, with tech giants like Nvidia and Marvell Technology seeing notable losses amid concerns over slowing AI demand and weaker-than-expected guidance [3]. Despite the near-term volatility, the S&P 500 remains on track for its fourth consecutive monthly gain, the longest streak since September 2024 [3].

The inflation data did not substantially alter expectations for a Federal Reserve rate cut in September. According to the CME FedWatch Tool, the probability of a 25-basis-point reduction at the September meeting stands at 85.2%, with the likelihood of two 25-basis-point cuts at 83.7% [1]. The core PCE index’s in-line reading with forecasts is viewed as supportive of a September cut, provided the upcoming nonfarm payrolls report does not indicate a stronger labor market. Analysts, including Bret Kenwell of eToro and Jennifer Timmerman of Wells Fargo Investment Institute, argue that a September rate cut is still likely given the Fed’s recent dovish rhetoric and the current economic conditions [3].

Personal consumer spending data for July showed a 0.8% increase, the largest four-month gain, indicating continued resilience in U.S. consumer demand despite ongoing inflation concerns [3]. This supports the broader narrative of a slowing—but not collapsing—economy, with policymakers balancing the need to curb inflation against the risks of an over-tight monetary policy. Gina Bolvin of Bolvin Wealth Management Group noted that while seasonal factors may exacerbate market volatility, the underlying fundamentals remain strong enough to support a rate cut in September [3].

Emerging-market currencies also responded to the data, with several Asian and European currencies rebounding after a two-day decline. The U.S. dollar saw limited movement, maintaining a neutral position as traders awaited further guidance on the Fed’s policy direction. The 10-year Treasury yield rose slightly to 4.23%, while the 2-year yield dipped, reflecting market expectations of lower rates in the near term [3].

With the core PCE data in hand and the nonfarm payrolls report due shortly, the Fed’s next move remains closely watched. If the labor market continues to show signs of weakness and inflation remains within the projected range, the central bank is likely to proceed with a 25-basis-point rate cut in September, reinforcing its commitment to supporting economic stability amid evolving macroeconomic conditions [3].

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