The Federal Reserve's preferred inflation indicator is coming tonight! The core PCE for July is expected to rise to 2.9% year-on-year, with tariff costs accelerating transmission

According to the Zhitong Finance APP, the U.S. Bureau of Economic Analysis (BEA) will release the personal income and expenditure report on Friday. The market expects that the core personal consumption expenditures (Core PCE) price index, an inflation indicator closely monitored by the Federal Reserve, will remain basically stable in July, but "basically stable" does not equate to "completely unchanged." The consensus forecast among economists indicates that the Core PCE price index (excluding food and energy price fluctuations) is expected to rise by 0.3% month-on-month in July, consistent with the increase in June; however, the year-on-year increase is expected to rise from 2.8% in June to 2.9%, still above the Federal Reserve's target inflation rate of 2%.

Federal Reserve policymakers pay particular attention to the Core PCE data, as it is considered a better reflection of "underlying inflation trends" than the overall PCE index (which includes food and energy) or the Consumer Price Index (CPI).

The level of inflation is a key consideration for the Federal Open Market Committee (FOMC) in setting interest rate policy: if inflation levels are higher than expected, the FOMC may lean towards raising interest rates; if price increases gradually slow down, they are more likely to consider cutting rates. Additionally, the state of the labor market is also an important reference for the Federal Reserve's interest rate decisions.

For the overall PCE index, economists expect the month-on-month increase in July to drop from 0.3% in June to 0.2%, while the year-on-year increase is expected to remain unchanged at 2.6%, consistent with June's figures. This consensus forecast for the overall and core PCE is generally in line with the "Inflation Nowcasting" results from the Cleveland Federal Reserve Bank.

Investors will focus on price changes in categories with high import dependence, such as furniture and appliances, to assess the impact of Trump's tariff policy. In fact, the June data has already shown a slight impact of tariffs, but it has not yet been significant.

However, the market generally believes that the impact of tariffs in the July data will not be significantly evident. Bill Adams, Chief Economist at Comerica Bank, explained two reasons in an interview: on one hand, there is uncertainty about the level of tariffs that businesses will ultimately bear, making them reluctant to raise prices hastily—after all, if tariffs decrease the next day, the price increase decisions made due to tariffs would lose their rationale; on the other hand, many import companies had already stockpiled inventory earlier this year, and they can currently delay price increases by digesting "inventory before tariffs take effect."

"The PCE inflation rate in July is likely to be slightly higher than in June," Adams stated, "since this spring, inflation has shown a gradual upward trend, as tariff costs are gradually transmitted along the 'port-warehouse-terminal cash register' chain to final prices."

He further pointed out that this transmission process will continue for several months: "Comerica Bank predicts that the transmission of tariffs to prices will be a gradual process, with increases likely peaking around the end of this year to the beginning of next year."

Specifically for the July data, Comerica Bank's forecast indicates that the overall PCE index will rise by 0.2% month-on-month, consistent with market consensus; the Core PCE index is expected to rise by 0.4% month-on-month, slightly higher than the market consensus of 0.3% "Overall, price pressures are gradually reflecting the impact of tariffs on the prices of goods in the economy, and this impact is somewhat offset by the easing of inflationary pressures in the housing sector," Adams added.

He believes that the impact of tariffs is most likely to be reflected in the prices of manufactured goods, including durable goods such as furniture and appliances, as well as non-durable goods like kitchenware; "Additionally, some food prices in the PCE report may also be affected by tariffs—the prices of vegetables in the Producer Price Index (PPI) have already seen significant increases, and the prices of related categories in the PCE typically correlate with the PPI."

It is noteworthy that the prices of spices, which have driven global trade for thousands of years, may become one of the categories most significantly affected by tariffs in the coming months.

Adams emphasized that the transmission of tariffs to commodity prices is "more a question of 'when it happens' rather than 'whether it happens'," so this factor is a secondary consideration in the inflation outlook over multiple quarters. "More importantly, the trend of core service prices excluding energy and housing—inflation in this area has slowed since 2025, but we have also observed signs of a rebound in some service prices in the PPI report."

The housing inflation that has remained high for years post-pandemic is currently gradually easing. "Over the past year, housing inflation in both the CPI and PCE indices has slowed, and this trend is likely to continue," Adams stated, "but the key question is: how much can housing inflation slow? To what extent can its slowdown offset the overall inflationary pressures from rising manufactured goods prices?"

Additionally, Adams expects that the personal income and expenditure report (including July PCE data) to be released on Friday will show robust consumer spending in July. He explained that due to the gradual phase-out of tax credit policies, consumers are rushing to purchase electric vehicles; "At the same time, gasoline consumption and summer travel demand may also drive growth in non-durable goods and service spending."

Overall, Adams believes that the current U.S. economy is resilient: "Uncertainty in trade policy has made the economic outlook for 2025 more volatile than expected in January, but the economy continues to grow."