Key facts
- US inflation, measured by the PCE price index, was 3.7% in July, the same as in June.
- Core inflation, excluding food and energy, was also unchanged at 3.3% year-over-year.
- Monthly inflation rose 0.2% for both headline and core prices in July.
- Energy costs, driven by the war with Iran, and AI infrastructure spending have contributed to elevated prices.
- Consumer confidence declined for the second month in a row in August.
US inflation remained stubbornly elevated in July, with the Federal Reserve's preferred measure, the personal consumption expenditures (PCE) price index, holding steady at 3.7% year-over-year. This marks the same rate as in June and remains significantly above the Fed's 2% target.
Core inflation, which excludes volatile food and energy prices, also showed no improvement, remaining at 3.3% annually. On a monthly basis, both headline and core prices increased by 0.2% in July, reversing a slight decline seen in June. This persistent inflation is creating a challenging environment for the Federal Reserve as it considers its next interest rate move.
Factors contributing to the elevated inflation include rising energy costs, partly attributed to the war with Iran, and increased spending on artificial intelligence infrastructure, which has driven up prices for computer chips. Additionally, President Donald Trump's threats of new tariffs on Canada and China could lead to higher import costs.
Despite the persistent price pressures, some Fed policymakers believe there is room to wait before raising rates, especially if higher oil prices do not broadly filter through the economy. However, others argue that inflation is not solely tied to energy and that the central bank must act decisively to maintain its credibility after years of elevated inflation.
The data also highlights the strain on consumers, who are facing higher prices for essentials like gasoline while wage growth stagnates. This has led to a decline in consumer confidence for two consecutive months. Policymakers will receive further inflation and labor market data before their upcoming meeting.