Inflation crept higher in July, showing fresh signs that President Donald Trump’s tariffs are feeding into the U.S. economy.
The Commerce Department reported on Friday that the personal consumption expenditures (PCE) price index—the Federal Reserve’s preferred inflation measure—showed core inflation running at a 2.9% seasonally adjusted annual rate.
That figure was 0.1 percentage point above June’s pace and marked the highest annual level since February.
The reading matched economists’ expectations, according to a Dow Jones survey.
On a monthly basis, the core PCE index rose 0.3%, also in line with forecasts.
The broader all-items PCE measure showed a 2.6% annual increase and a 0.2% monthly gain, both precisely meeting consensus estimates.
Fed Eyes Inflation but Focus Remains on Jobs
The Federal Reserve relies heavily on the PCE index when making policy decisions.
While it monitors both the headline and core figures, officials typically view core inflation as the more reliable gauge of long-term trends, since it excludes volatile food and energy costs.
With the Fed targeting 2% inflation, July’s results suggest conditions remain above the central bank’s comfort zone.
Even so, financial markets continue to expect an interest rate cut when policymakers meet next month.
Fed Governor Christopher Waller said Thursday he still supported a reduction and would consider a larger move if labor market weakness persisted.
“The Fed opened the door to rate cuts, but the size of that opening is going to depend on whether labor-market weakness continues to look like a bigger risk than rising inflation,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.
“Today’s in-line PCE Price Index will keep the focus on the jobs market. For now, the odds still favor a September cut.”
Tariffs Add Pressure to Prices
The uptick in inflation comes months after the White House imposed sweeping tariffs on imports.
In April, Trump introduced a baseline 10% tariff on all inbound goods.
Since then, his administration has expanded so-called reciprocal tariffs on key trading partners and levied duties on individual product categories.
The White House has also eliminated exemptions for imports valued under $800, further raising costs for businesses and consumers.
Economists say the gradual effect of these measures is now showing up in the price data.
Consumer Spending Remains Resilient
Despite higher inflation, consumer activity stayed firm in July.
Personal spending grew 0.5% for the month, matching forecasts and reflecting ongoing strength in household demand.
Personal income rose 0.4%, also hitting expectations and adding momentum to the consumer-driven economy.
Analysts noted that while Americans are paying more for goods and services, incomes are keeping pace, providing some cushion against higher prices.
Energy and Goods Prices Temper Overall Inflation
Energy costs played a key role in containing the overall inflation numbers.
Prices for energy goods and services fell 2.7% over the past year, while food prices increased 1.9%.
The breakdown showed a sharp divide between categories.
Service-sector prices jumped 3.6% year-on-year, while goods prices rose just 0.5%.
On a monthly basis, energy costs declined 1.1% and food slipped 0.1%.
Services rose 0.3% in July, accounting for nearly all of the monthly increase, while goods fell 0.1%.
Market Reaction Mixed
Following the release of the report, U.S. stock market futures remained in negative territory.
Treasury yields, however, held onto earlier gains, signaling investors were still weighing whether stronger inflation might complicate the Fed’s path to rate cuts.
The July data painted a mixed picture—an economy still supported by consumer spending and income growth, yet facing the dual pressures of tariffs and elevated service costs.
As policymakers prepare for their September meeting, the balance between inflation concerns and labor market risks will shape the Fed’s next move.