The Fed's favorite inflation indicator may rise for the third consecutive time, but expectations for a September rate cut remain unshaken?

Before Powell opened the door to a September rate cut at the Jackson Hole conference, he had a general understanding of the PCE situation, which may have mitigated the potential impact of a high inflation report.

Tariff-driven inflation is gradually permeating the US economy, while economic growth momentum has also weakened.

The core personal consumption expenditures (PCE) index, the Fed's preferred inflation indicator, will be released at 8:30 pm Beijing time on Friday. It is expected to rise 0.3% month-over-month in July, the same as the previous month.

If this forecast is realized, the year-over-year growth rate of PCE inflation will rise from 2.8% to 2.9%, the highest level since February of this year and the third consecutive month of increase. Some economists even predict that the year-over-year growth rate could jump to 3%, which would be the highest level since March 2024.

"Inflation has been rising since the spring, as tariff costs have trickled down from ports to warehouses to checkout counters," Bill Adams, chief economist at Comerica Bank, said in an interview.

July's producer price index (PPI) data, released earlier this month, showed a rise in services inflation. This was surprising, as services are not typically affected by tariffs (which apply only to imported goods).

"I'll focus on the core services sector, excluding energy and housing, which showed a warmer tone in the PPI report, potentially suggesting that inflation in 2025 may not be solely driven by tariffs," Adams said.

However, the impact of the high inflation report may be mitigated somewhat, as Federal Reserve Chairman Jerome Powell said last week that his concerns about inflation have significantly diminished, and he is now more focused on the job market—suggesting a possible case for a rate cut in September.

Powell already had a rough estimate of PCE inflation before his speech in Jackson Hole, Wyoming, opening the door to policy easing next month, as the PCE data is derived from the already released consumer and wholesale price indexes.

Economists say high inflation could limit the scope for further rate cuts later this year. Some believe that only a surge in August CPI inflation, due in two weeks, could prompt the Federal Reserve to reconsider its interest rate cut plans at its September 16-17 meeting.

Consumer spending may have peaked in July.

The upcoming PCE report will also include consumer spending data, which is expected to rise 0.5% month-over-month in July, accelerating from a 0.3% increase in the previous month.

However, analysts believe that the July increase in consumer spending was driven by a surge in new car sales, and subsequent growth will slow.

"Consumers are still spending, but they're becoming more selective," said Sam Bullard, senior economist at Wells Fargo.

Jennifer Lee, senior economist at BMO Capital Markets, said she will focus on wage data—a slight increase in wages in June could indicate a lack of consumer spending momentum.

U.S. personal consumption expenditures grew 1.6% in the second quarter. Lee predicts that consumer spending growth will slow to 1.3% in the third quarter and to 1.1% in the fourth quarter, driven by rising prices and a slowing job market.

She added in the interview that as long as the U.S. and China maintain their trade truce, it will create a buffer to avoid a sharp drop in consumer spending.