The core PCE price index rose 0.3% in July, as the consensus expected. On an annual basis, the overall PCE price index increased to 4.5%, the highest reading since 1990, up from 4.0% in June. Meanwhile, the core PCE price index gained 2.4%, up from 2.3% in June, the highest reading in two years.

Despite the rise in the core price index, economists from Calyon Capital Markets expect the Fed to hold off on a rate hike in the near term.

"Although the increase is a source of concern for the Fed, we believe that policymakers remain focused on the downside risks to growth and the fragility of the financial markets," economists from Calyon Capital Markets noted. "We expect that the FOMC will keep rates on hold until next year."

Markets are pricing in an 82.8% chance that the Fed will hold rates at the upcoming Oct. 29 meeting, up slightly from Thursday's 81%. The remaining 16.4% favour a 25bp hike.

Dean Maki, economist at Barclay's agrees with the consensus. "While the overall and core inflation readings are well above what FOMC members suggest is their preferred range for inflation, we expect the Fed to continue to keep rates unchanged in response to their forecast that these measures will be moderating," Maki wrote.

Looking to the year-end meeting scheduled for Dec. 16, the implied probability for rates to remain at 2.00% is currently at 82.8%, higher than yesterday's 77.9% expectation.

Concerns about stagflation persist amid yesterday's strong Q2 GDP results and today's inflation data,

"The Fed has acknowledged that core inflation might rise this year and still expects inflation to fall in 2009 as a result of lower commodity prices and greater slack in the labor market," economists from RDQ wrote in a note to clients. "In our judgment, the stagflation signals from this report are strong."

Markets are looking for a 16.4% chance that the Fed will raise rates by 25bp by the year-end FOMC meeting scheduled on Dec 16. One month ago, markets were pricing in a 46% chance of a 25bp rate hike.

By Steve Stecyk, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, This email address is being protected from spam bots, you need Javascript enabled to view it

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