Inflation in the United States remained at 3.7 percent in July, significantly above the Federal Reserve’s 2 percent target, according to data released by the US Bureau of Economic Analysis.
The Personal Consumption Expenditures (PCE) Price Index, which the Federal Reserve closely monitors when setting interest rates, was unchanged from June. Economists had expected inflation to come in slightly lower at 3.6 percent.
On a monthly basis, the PCE index increased 0.2 percent in July, following a 0.1 percent decline in June. The July increase was also higher than economists’ forecast of 0.1 percent.
Core PCE inflation, which excludes food and energy prices and is considered a key measure of underlying inflation, remained at 3.3 percent annually. It rose 0.2 percent in July compared with 0.1 percent in June.
Pressure on the Federal Reserve
The latest figures have strengthened expectations that the Federal Reserve could consider raising interest rates at its September meeting.
Financial markets were pricing in about a 42 percent chance of a rate hike at the September 15–16 meeting, up from around 36 percent before the inflation report was released.
“This is data that supports a hike,” said Omair Sharif, founder and president of Inflation Insights.
Impact of Iran War and Tariffs
US inflation has increased since the United States and Israel attacked Iran in late February. At that time, annual PCE inflation stood at 2.9 percent.
Inflation climbed to 4.1 percent in May, its highest level in three years, as energy prices surged amid disruptions to global oil supplies caused by the conflict.
Although oil prices have since fallen from their spring highs, petrol prices in the US have risen again. The average national petrol price reached about $4.10 per gallon in August, according to the American Automobile Association.
Additional inflationary pressure could also come from new tariffs following the breakdown of trade negotiations between the US and Canada. Washington has imposed new levies on about $20 billion worth of Canadian products, while both countries have announced retaliatory measures.
Despite the easing of inflation from its May peak, many American consumers remain pessimistic about the economy. Inflation-adjusted incomes increased only 0.2 percent from a year earlier, following several months of declines.
The latest figures could therefore add to pressure on the Federal Reserve as it weighs whether to keep interest rates unchanged or tighten monetary policy further.
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