Core Personal Consumption Expenditures inflation is stuck near 3.3% even as President Trump insists prices are falling fast. The gap between his claim and the Fed's preferred gauge raises the odds of higher interest rates, a risk to the record run in the Dow, S&P 500, and Nasdaq Composite.
President Trump said: "prices are dropping fast" on Aug. 11, but Core Personal Consumption Expenditures data tells a different story. The metric, which strips out volatile food and energy costs, is the Federal Reserve's preferred gauge of underlying inflation pressure. Core PCE has barely moved, and that stickiness threatens the historic rally in stocks.
Headline inflation falls, but the core reading won't budge
Trailing 12-month inflation jumped from 2.4% in February to a three-year high of 4.2% in May after Trump's Iran war closed the Strait of Hormuz, halting roughly 20 million barrels of daily petroleum flow. Peace talks then pulled oil prices down, and headline inflation eased to 3.5% in June and 3.4% in July.
But headline inflation is not the whole picture. Core PCE climbed to a nearly three-year high of 3.4% in May before easing only to 3.3% in June. The Federal Reserve Bank of Cleveland's Inflation Nowcasting tool projects it will hold at roughly 3.3% through July and August.
Tariffs and the Iran war keep costs elevated
Adding duties on select unfinished goods can increase domestic manufacturing costs that are then passed on to consumers. The Iran war compounds that pressure: select companies have been forced to reroute shipments, adjust supply chains, or alter transportation since the Strait of Hormuz closure, and petroleum-based inputs like plastics and synthetic polymers have gotten more expensive. Businesses can absorb those costs and hurt their margins, or pass them on to customers.
Bond market signals rate-hike risk for stocks
The 30-year Treasury bond yield recently reached a 19-year high, a signal that bond investors expect Fed Chair Kevin Warsh and the Federal Open Market Committee to eventually raise rates. That prospect threatens a stock market whose gains under Trump have outpaced most presidents since the late 1890s and whose AI infrastructure build-out has been fueled in part by debt financing. If borrowing costs rise, the data center spending fueling the rally could get more expensive to sustain.
Source: The Motley Fool
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