Key inflation gauge remains elevated during Iran conflict and ongoing US trade fights
WASHINGTON (AP) — An inflation measure closely watched by the Federal Reserve was unchanged last month in the latest sign that many Americans are still struggling with higher costs.
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%.
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.
The new inflation data is unlikely to fully resolve a split at the Federal Reserve, where most officials are willing to hold interest rates steady to see if inflation can cool on its own. But many Fed officials have supported raising rates in a bid to slow borrowing and spending to combat higher prices. New Fed Chair Kevin Warsh will deliver a high-profile speech Friday in Jackson Hole, Wyoming that will be closely watched by Wall Street for any signs of his thinking about next steps.
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.
Separately, a second estimate from the government Wednesday showed that the economy grew at a sluggish pace in the April-June quarter, expanding at a 1.5% annual rate, down from 2.1% in the first quarter. Still, consumer spending was healthy and businesses ramped up investment in AI infrastructure.
Americans may be turning more cautious as inflation stays high. Consumer spending, adjusted for inflation, was unchanged in July.
On a monthly basis, overall inflation 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, higher than 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.
Gas and other energy prices fell sharply last month, the report showed, declining 2.7% from June to July. Grocery prices also slipped 0.1%. Yet car prices jumped 0.4% and the cost of housing and utilities moved up 0.3%.
On a more positive note, Americans' incomes rose at a healthy clip. Adjusting for inflation, they increased 0.4%, the best showing since February. Still, compared with a year ago, Americans' incomes have just kept pace with inflation.
And gas prices have rebounded this month, which will likely push up inflation when the August figures are reported next month. Prices ticked up again overnight to $4.10 per gallon on average, according to the AAA. Many Fed officials worry that with inflation topping their target for more than five years, higher rates may be necessary to get price increases under control.
Persistent inflation has contributed to higher longer-term interest rates, which have lifted borrowing costs for things like mortgages, auto loans, and credit cards. Many Wall Street analysts say that a lack of clarity from Fed chair Warsh about how the Fed will respond to persistent inflation has also pushed up those rates. The yield on 30-year Treasury bonds briefly reached a 19-year higher earlier this month, prompting an unusual intervention by Treasury Secretary Scott Bessent.
Bessent said the Treasury would double its buybacks of longer term bonds — those lasting for 10 to 30 years — starting next month. Such a move would raise Treasury prices and lower yields, which move in the opposite direction. The announcement initially had little effect, though yields have since declined.
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