Inflation gauge remains elevated during trade war
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WASHINGTON -- An inflation measure closely watched by the Federal Reserve stayed elevated last month in the latest sign that many Americans are still struggling with higher costs.
Stubbornly high prices are shaping up to be a key issue in the midterm elections, now just 10 weeks away, particularly as the Iran war keeps gas prices high, President Donald Trump is threatening new tariffs on Canada and China, and spending on AI infrastructure has pushed up the cost of computers, gaming consoles, and semiconductors.
Inflation remained high in July even as gas prices fell, partly because the cost of services, including health care, utilities, and financial services, jumped. Yet the government plans to change the way it calculates the cost of some services starting with next month's figures, which could lower measured inflation.
Inflation remains above the Fed target
The Commerce Department's Wednesday report showed that prices rose 3.7% in July compared with a year earlier, the same as June. Inflation has worsened since the U.S. and Israel attacked Iran in late February, when it stood at 2.9%. It's noticeably above the Fed's target of 2%.
Wednesday's figures are from the personal consumption expenditures price index, a separate gauge from the more widely followed consumer price index, which was reported earlier this month. The PCE index is running hotter than the CPI, partly because it puts much less weight on rental costs, which have been cooling steadily in recent months.
Excluding the volatile food and energy categories, core inflation was also unchanged at 3.3% in July. It had fallen to 2.6% before President Donald Trump imposed sweeping tariffs in April 2025.
On a monthly basis, overall prices rose 0.2% from June to July, after declining 0.1% the previous month and jumping 0.5% in May. Core prices also moved up 0.2% from June to July, up from 0.1% in the previous month. Some Fed officials have said that core inflation running at about 0.2% a month would be a reassuring sign that inflation is heading back to the 2% target.
Inflation gauge will be revised lower
Many economists have noted that the PCE index has been pushed higher by the way it calculates the cost of financial advice, as well as how it measures prices for software and computer accessories. When stock markets rise, that translates into bigger gains in what the government calls "portfolio management services." Yet that measure doesn't always fully capture what Americans actually pay for financial services.
At the same time, the PCE also likely captures some business-related spending on software, even though it should only focus on consumer spending, analysts say.
As a result, the Commerce Department has said it plans to adjust those measurements, among others, starting next month. Economists, who largely agree with the changes, forecast that they will reduce annual PCE inflation by 0.2 percentage point or so.
Why do things still feel expensive?
Even as inflation has cooled from its post-pandemic highs -- it topped 7% according to the Fed's preferred gauge in 2022 -- consumer sentiment surveys show that most Americans are still gloomy about the economy and their finances.
A key reason is likely that inflation, even at lower levels, has eroded incomes. Wednesday's data show that compared with a year ago, inflation-adjusted incomes have risen just 0.2%, after several months of decline.