Pantheon Macroeconomics analysed the data from both the Consumer Price Index (CPI) and the Producer Price Index (PPI). They revised their core Personal Consumption Expenditures (PCE) prediction to 0.26%, an increase from the previous 0.23% following the publication of the latest CPI figures.
This adjustment would raise the year-on-year core PCE estimate to 2.9%, up from 2.8% recorded the previous month.
Core PCE Inflation Predictions
Based on the latest inflation inputs, we now see core PCE inflation for July coming in hotter at 0.26%. This pushes the year-over-year figure up to 2.9%, a step in the wrong direction from last month’s 2.8%. This suggests the disinflation we enjoyed through 2024 is facing headwinds.
This stubbornness in inflation complicates the Federal Reserve’s path forward, making the case for further rate cuts in 2025 much weaker. The market has been pricing in a steady easing cycle, but this data now favors a “higher for longer” interest rate environment. We must adjust our expectations for a more cautious, data-dependent Fed for the remainder of the year.
For derivative traders, this means interest rate futures need immediate repricing. The probability of a rate cut by the December 2025 meeting, which had been hovering around 65% on the CME’s FedWatch Tool, will likely drop below 50%. Positions betting on an aggressive easing path should be reconsidered or hedged.
Market Volatility Expectations
We should anticipate a rise in market volatility as this uncertainty gets priced in. The VIX, which has been subdued near 14, will likely trend back up toward its historical average near 18. This is a signal to consider buying protection, such as index put options, or implementing strategies that profit from wider price swings.
This outlook is also bullish for the U.S. dollar, as higher relative interest rate expectations increase its appeal. We can expect the 2-year Treasury yield, highly sensitive to Fed policy, to climb on this news. Traders could look at long dollar call options or short positions in Treasury note futures to capitalize on this shift.
This situation reminds us of the period back in 2022-2023, when unexpectedly sticky inflation repeatedly forced the Fed to act more aggressively than markets anticipated. Those events showed how quickly sentiment can turn on a single data point. The current data serves as a warning that the fight against inflation is not yet over.
