On July 26, 2026, the US Commerce Department's Bureau of Economic Analysis (BEA) reported that the June core Personal Consumption Expenditures (PCE) price index rose 2.8% year-over-year, above the market expectation of 2.6% and the prior 2.7%; month-over-month it rose 0.3%, also above the expected 0.2%. The data indicates that the US disinflation process has stalled again, driven primarily by tight labor market and sticky services prices.
Data Details: Services Inflation as Key Variable
The report showed overall PCE rose 3.1% YoY in June, and core PCE (excluding food and energy) rose 2.8% YoY. By component, goods prices edged down 0.2% YoY, but services prices rose 4.1% YoY, led by housing services, healthcare, and transportation services. On a monthly basis, core PCE's 0.3% rise was the highest since October 2025, staying in the 0.2%-0.3% range for three consecutive months.
The root of inflation stickiness lies in the labor market: average hourly earnings still grew 4.5% YoY in June, and services firms keep passing costs to consumers. Additionally, while housing rents slowed somewhat, owners' equivalent rent (OER) still rose 0.4% MoM, continuing to support inflation.
Market Reaction: Rate Cut Expectations Hit Hard
After the data release, financial markets quickly repriced. The US dollar index surged 0.6% to 105.8, a two-week high; the 10-year Treasury yield jumped 8 bps to 4.75%, and the 2-year yield rose to 5.12%. Major US stock indexes opened lower across the board, with the S&P 500 falling over 1.5% at one point, led by tech stocks. According to the CME FedWatch tool, the market probability of a Fed rate cut in September plunged from 48% to 22%, and the probability of a December cut fell below 60%.
Paul Ashworth, Chief North America Economist at Capital Economics, noted: "Core PCE MoM of 0.3% is still above the level needed to be consistent with the Fed's 2% target (about 0.17%). Unless the data improve markedly in coming months, the door to rate cuts this year is slowly closing." However, some analysts believe the July CPI report (due Aug 12) could weaken due to falling energy prices, potentially resetting expectations.
Hawkish Voices Strengthen Within the Fed
After the data release, 2026 FOMC voter and Cleveland Fed President Loretta Mester stated: "Today's report is disappointing. We need to see more evidence that inflation is sustainably moving toward target. Cutting rates too early would repeat the mistakes of the 1970s." Another voter, San Francisco Fed President Mary Daly, was relatively dovish, saying more data on employment and inflation over the coming months needs to be observed.
At its June meeting, the Fed held the federal funds rate at 5.25%-5.50%, with the dot plot suggesting one rate cut this year. But after the latest PCE data, some economists have trimmed rate cut expectations. Goldman Sachs pushed its forecast for the first cut from September to December, and Deutsche Bank even sees a 35% probability of no rate cut throughout 2026.
Historical Comparison: Current Inflation Cycle vs. 1980s Lessons
The current situation somewhat resembles 1986-1987, when US inflation rebounded after a brief decline, forcing the Fed to hike again in spring 1987. Moreover, the 1994-1995 "soft landing" experience shows that inflation is stickiest in the final stage, requiring a longer period of restraint.
BGU FinData's macro model analysis indicates that if core PCE MoM stays above 0.25% for the next three months, the YoY rate could approach 3% again, potentially forcing the Fed to resume hiking rather than cutting. However, given that the manufacturing PMI has been in contraction for two consecutive months (US June ISM Manufacturing PMI at 48.9), the room for rate hikes is very limited.
Asset Allocation Implications: Defense First, Focus on Data Dependency
For investors, this data flash provides three key signals: first, increased uncertainty in the inflation path; second, a delayed pivot by the Fed toward easier policy; third, potentially higher asset volatility. BGU FinData recommends short-term allocation to short-dated Treasuries and gold, while reducing exposure to rate-sensitive growth stocks. Additionally, watch the July inflation data and the August Jackson Hole global central bank conference for policy signals.
The Data Flash column will continue tracking market anomalies and policy changes, providing investors with timely in-depth analysis. We will publish tomorrow an analysis titled "Reassessing the Fed's Policy Path: A Simulation Based on the Taylor Rule and Dot Plot," stay tuned.
