Inflation Remains Sticky — Fed’s Rate Cut Path May Turn More Cautious

TradingKey - On Friday (U.S. Eastern Time), new U.S. data showed that consumer spending rose strongly for the second consecutive month in August, increasing 0.4% after inflation adjustment, well above the expected 0.2%, underscoring continued resilience in household demand.

The August PCE Price Index came in at 2.7% year-over-year, while the core PCE index (excluding food and energy) rose 2.9% annually — both in line with expectations but still significantly above the Federal Reserve’s 2% target.

Market reaction was relatively muted: equity futures saw only minor fluctuations, with Nasdaq-100 futures holding a gain of around 0.3%. The Dollar Index dipped slightly to 98.33.

Markets have increased their bets on a 25-basis-point rate cut in October, rising from 85.5% to 87.7%, according to the CME Group’s FedWatch Tool.

Despite robust consumption, sticky inflation remains a central challenge for the Fed. Many companies are still drawing down pre-tariff inventory to hedge against rapidly rising input costs. While this has so far shielded consumers from direct price shocks, firms will eventually need to pass through higher costs to maintain profit margins — which could reignite upward pressure on prices.

This inflation outlook forces the Fed to proceed cautiously on monetary easing. Chair Jerome Powell recently stated the central bank faces a “challenging situation,” with persistent risks that inflation could prove more persistent than expected, even as softening labor market growth raises concerns about economic health.

Notably, President Trump has recently extended tariffs to a broader range of goods, including pharmaceuticals, adding further uncertainty to the inflation outlook. Historically, the Fed has tended to wait for clear evidence of how tariffs impact prices before adjusting rates — a more backward-looking approach — rather than acting purely on forward-looking guidance as suggested by Treasury Secretary Scott Bessent and Fed Governor Stephen Miran.