2.9% rise highest since Feb

Inflation in the United States ticked up in July, as indicated by the Federal Reserve’s preferred measure of inflation, suggesting that President Donald Trump’s tariffs are starting to impact the economy. The personal consumption expenditures price index, which excludes food and energy costs, showed that core inflation rose to a 2.9% seasonally adjusted annual rate in July, according to a report from the Commerce Department. This was a slight increase from the previous month and the highest annual rate since February, in line with expectations.

The Federal Reserve uses the core PCE price index as a key indicator for forecasting. Policymakers focus on core inflation as it provides a better insight into long-term trends by excluding volatile components like food and energy prices. The overall PCE index showed an annual rate of 2.6% and a monthly increase of 0.2%, meeting market expectations.

Central bankers aim to maintain inflation at around 2%, indicating that the current inflation rate is still above the Fed’s target. Despite the higher inflation numbers, market analysts anticipate that the Fed will continue to lower its benchmark interest rate at the next meeting. Fed Governor Christopher Waller expressed support for a rate cut, especially if labor market conditions deteriorate further.

President Trump’s tariffs, imposed earlier this year, have contributed to the rise in inflation. In addition to tariffs on imports, reciprocal tariffs on trading partners and duties on specific goods have been implemented. The removal of exceptions for goods under $800 has also impacted prices.

Consumer spending increased by 0.5% in July, reflecting strength in the economy despite higher prices. Personal income also saw a 0.4% increase, aligning with market expectations. Stock market futures remained negative following the inflation report, while Treasury yields experienced gains.

The inflation data showed a decline in energy prices by 2.7% annually, while food prices rose by 1.9% from the previous year. Services prices saw a significant increase of 3.6%, compared to a modest 0.5% rise in goods prices. Monthly changes reflected a decrease in energy and food prices, with services prices accounting for the majority of the increase.

Overall, the latest inflation data highlights the impact of tariffs on the U.S. economy and the ongoing efforts by the Federal Reserve to manage inflation and support economic growth. The market will continue to monitor these developments closely as policymakers assess the need for further rate adjustments.