US Inflation Stays Hot in July, Adding Pressure on Fed

Inflation in the US remained significantly above the Federal Reserve's 2% target in July, marking the 65th consecutive month of overshooting. This has intensified the debate over whether the central bank should keep or raise interest rates.

According to data released Wednesday by the Bureau of Economic Analysis at the US Commerce Department, the PCE price index for the 12 months through July was 3.7%, unchanged from June. That was slightly higher than the 3.6% forecast from economists surveyed by Reuters. PCE is the Fed's preferred measure for adjusting its benchmark interest rate.

On a monthly basis, the PCE index rose 0.2%, above expectations, after falling 0.1% in June (the weakest decline since April 2020). Economists had predicted a 0.1% gain for July.

Excluding energy and food prices, the core PCE index—a gauge used by Fed officials to assess underlying inflation trends—held steady at 3.3% year-over-year, while rising 0.2% from the previous month, up from June's 0.1% increase.

Wednesday's data reinforced expectations that the Fed could raise rates as soon as next month. Federal funds futures reflected about a 42% probability of a rate hike at the Fed's September 15-16 meeting, up from roughly 36% before the report was released.

"This is data that supports a rate hike," said Omair Sharif, founder and president of forecasting firm Inflation Insights.

Impact of War and Tariffs

Inflation has worsened since the US and Israel attacked Iran in late February, when inflation was 2.9%. The annual PCE index spiked to a three-year high of 4.1% in May as energy prices surged due to conflict disrupting about one-fifth of global oil supply.

Six months later, the conflict appears far from over, although fighting has subsided and oil prices, along with the wave of inflation they triggered, have cooled from their mid-spring peaks.

However, consumer sentiment surveys show that most US consumers remain pessimistic about the economy and their finances.

One major reason may be that inflation, though lower, is still eroding incomes. Wednesday's data showed that, compared to a year earlier, inflation-adjusted income rose only 0.2% after several months of decline.

Gas prices have ticked back up this month, which could push inflation higher when August data is released next month. According to the American Automobile Association (AAA), the national average gas price rose to $4.10 per gallon (3.8 liters) overnight.

Pressure from new tariffs could also emerge after trade negotiations between the US and its second-largest trading partner, Canada, collapsed on Friday, leading to new tariffs on $20 billion worth of Canadian goods. Since then, Washington and Ottawa have announced additional retaliatory measures that will take effect in the coming months unless a deal is reached to prevent them.