Key facts
- The Federal Reserve's preferred inflation gauge, the PCE price index, showed prices rose 3.7% in July year-over-year, unchanged from June.
- Core inflation, excluding food and energy, also held steady at 3.3% in July.
- Monthly inflation rose 0.2% in July, with core prices also increasing by 0.2%.
- Service costs, including health care and utilities, contributed to elevated inflation.
- Inflation-adjusted incomes have risen only 0.2% over the past year.
- Gas prices have rebounded, averaging $4.10 per gallon nationally.
The Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, remained unchanged in July, holding steady at a 3.7% annual increase. This figure remains significantly above the Fed's 2% target, complicating the central bank's decision-making process regarding interest rates. Stubbornly high prices, particularly in services like healthcare and utilities, are impacting consumers and are expected to be a key issue in the upcoming midterm elections.
Core inflation, which excludes volatile food and energy prices, also held steady at 3.3% year-over-year. On a monthly basis, both overall and core prices rose by 0.2% in July. Despite a recent fall in gas prices, they have begun to rebound, with the national average reaching $4.10 per gallon, which could further pressure inflation figures.
Analysts note that the PCE index may be influenced by how it measures financial services and software costs, with the Commerce Department planning adjustments next month that could lower measured inflation by approximately 0.2 percentage points. Even with cooling inflation from post-pandemic highs, consumer sentiment remains gloomy, partly due to eroded incomes, which have risen only 0.2% in real terms over the past year. Consumer spending, adjusted for inflation, was flat in July.
The persistent inflation data is unlikely to resolve internal divisions at the Federal Reserve, where some officials favor holding rates steady while others support further hikes to curb spending and borrowing. Fed Chair Kevin Warsh is scheduled to deliver a significant speech on Friday in Jackson Hole, Wyoming, which will be closely scrutinized for insights into the Fed's future policy direction. Higher interest rates have already led to increased borrowing costs for mortgages, auto loans, and credit cards.