The Federal Reserve's preferred inflation gauge held steady in July, according to fresh data from the Bureau of Economic Analysis released Wednesday. The personal consumption expenditures (PCE) price index rose 0.2% for the month, leaving the annual rate unchanged at 3.7% year-over-year—exactly matching June's figure.
Stripping out the often-volatile food and energy components, core PCE inflation advanced 3.3% from a year earlier, a slight cooling from the previous month's 3.4% pace but still well above the Fed's 2% target.
The flat reading suggests that price pressures remain stubbornly elevated, even as the broader economy shows signs of moderating. The data lands just weeks before the Federal Open Market Committee's next policy meeting, where officials are widely expected to hold interest rates steady once again, though the decision is far from unanimous.
CPI Tells a Similar Story
Separately, the Labor Department's consumer price index (CPI), released in mid-August, showed a modest easing in July. Prices ticked up 0.1% for the month, pulling the annual inflation rate down to 3.4% from 3.5% in June. While CPI and PCE measure different baskets of goods, both have been running above the Fed's comfort zone for over two years.
The persistence of high inflation has become a central political liability for the White House, and it remains a top concern for voters heading into the 2024 election. Recent polling shows that Democrats are gaining ground on economic trust, but inflation still tops the list of voter worries.
Oil and Geopolitics Drive Price Swings
The inflation trajectory has been heavily influenced by energy markets, which in turn are tied to geopolitical tensions in the Middle East. Both PCE and CPI surged to three-year highs in May, then eased in June after the U.S. and Iran agreed to a pause in hostilities. That detente helped push oil prices down, as markets bet on the reopening of the Strait of Hormuz—a crucial waterway that carries roughly one-fifth of the world's oil supply.
But the calm proved short-lived. By July, the two sides had resumed strikes, sending crude prices climbing again. The Trump administration has since escalated its economic pressure campaign against Tehran, urging countries to sever financial ties in what officials have dubbed a financial "D-Day."
Fed Holds Rates, Split Decision
At its late-July meeting, the Fed opted to keep its benchmark interest rate unchanged for the fifth consecutive session. The decision was not unanimous: three officials voted in favor of a quarter-point hike, reflecting internal disagreement over how much more tightening is needed to bring inflation under control.
Minutes from that gathering, released last week, revealed that most policymakers expected inflation to "step down over the rest of the year." However, "many" participants acknowledged the possibility that price pressures could remain elevated, and some argued that "policy tightening would likely be necessary if inflation did not decline."
Fed Chair Jerome Powell has repeatedly stressed that the central bank will rely on incoming data to guide its next moves, and the flat PCE reading may give officials cover to hold rates steady when they meet in mid-September. Traders currently assign roughly a 60% probability that the Fed keeps rates at their current level after that meeting.
The sticky inflation picture also complicates the broader fiscal landscape. With the federal debt topping $39.9 trillion and political pressure mounting to address spending, the Fed's job of balancing price stability with economic growth has never been more delicate.
