Core inflation hits highest level since February
Inflation in the United States continued to climb in July, according to the Federal Reserve’s preferred gauge. The core personal consumption expenditures (PCE) index, which excludes food and energy, rose 2.9% at an annualized rate—its highest reading since February. This marks a 0.1 percentage point increase from June and aligns with analysts’ forecasts.
Monthly, core PCE rose by 0.3%, while the all-items index increased 0.2% for a 2.6% annual rate. Both metrics were consistent with expectations and confirm that inflation remains well above the Fed’s 2% target.
Fed eyes September rate cut amid labor concerns
Despite rising prices, markets are betting on an interest rate cut in September. Fed Governor Christopher Waller expressed support for such a move, especially if labor market indicators weaken further. Analysts suggest that the inflation report, which matched forecasts, shifts attention to employment data as the main factor in upcoming policy decisions.
“The Fed opened the door to rate cuts, but the size of that opening depends on labor-market risk,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.
Trump’s tariffs impact prices and trade flow
President Trump’s tariffs—starting with a 10% baseline on all imports and additional reciprocal duties—have begun influencing inflation dynamics. The elimination of exceptions for goods under $800 has also added to upward pricing pressure.
Still, not all prices increased. Energy prices fell 2.7% year-over-year and 1.1% monthly, helping to contain the broader inflation spike. Food prices rose 1.9% over the past year but dipped slightly on the month. The major driver of inflation was services, which jumped 3.6% annually and 0.3% in July alone, while goods prices barely moved.
Consumer resilience supports economy
Despite inflation, American consumers continue to spend. Personal spending rose 0.5% in July, in line with projections, and personal income increased 0.4%. These gains suggest that households are absorbing higher prices without significantly cutting back—at least for now.
Stock futures remained negative following the report, while Treasury yields held steady. The balance of inflation and labor data will now shape the Fed’s next steps as policymakers seek to navigate conflicting signals in a turbulent economic environment.
