Inflation held steady in July, with the Federal Reserve’s preferred price gauge showing a slight deceleration in cost pressures and defying predictions from Fed Chairman Jerome Powell that tariffs would push up consumer prices, government data released Friday showed.
The personal consumption expenditures price index rose 2.6 percent from a year earlier, matching economists’ forecasts and holding at the same annual pace as June. On a monthly basis, prices increased 0.2 percent, also in line with expectations and down from the previous month’s 0.3 percent increase.
If the July rate of inflation were to continue for the next twelve months, inflation would fall to 2.4 percent.
Core prices, which exclude volatile food and energy costs and are closely watched by Fed officials, rose 2.9 percent annually and 0.3 percent for the month — both figures meeting Wall Street predictions.
The relatively benign inflation reading offered reassurance to policymakers that price pressures remain manageable, even as services continued to be the primary driver of increases. Services prices climbed 3.6 percent from a year earlier, while goods prices increased 0.5 percent over the same period.
The monthly breakdown showed goods prices fell 0.1 percent in July, with energy costs dropping 1.1 percent and durable goods declining 0.1 percent. Over the past year, energy prices have fallen 2.7 percent while durable goods prices rose a modest 1.1 percent, and nondurable goods prices increased just 0.2 percent annually.
The lackluster price increases in goods categories most susceptible to tariff effects contrasts sharply with earlier warnings from Federal Reserve officials. Despite the United States collecting hundreds of billions of dollars in tariffs since the Trump administration’s trade policies took effect, consumer prices for both durable and nondurable goods — the categories most likely to reflect tariff costs — have shown minimal increases.
The data challenge Powell’s repeated assertions about tariffs’ inflationary impact. “Tariffs are highly likely to generate at least a temporary rise in inflation,” Powell said in April. He warned that “the inflationary effects could also be more persistent” and described the tariff increases as “significantly larger than expected.”
The Bureau of Economic Analysis data showed Americans continued spending despite ongoing price pressures. Personal consumption expenditures — the broadest measure of consumer spending — increased 0.5 percent in July, led by purchases of motor vehicles, financial services and housing-related expenses.
Personal income also advanced, rising 0.4 percent as wages and salaries increased across private-sector employers. The income gains primarily reflected higher compensation, including both direct wages and employer contributions to employee benefits, according to the report.
After accounting for taxes and inflation, real disposable income edged up 0.2 percent, providing consumers with modest additional purchasing power.
The inflation data will likely factor into Federal Reserve deliberations as officials weigh their next moves on interest rates. The central bank has been working to bring inflation back to its 2 percent target while maintaining economic growth.
The persistent strength in services inflation — which includes categories like housing, healthcare and financial services that are largely insulated from international trade — highlights the domestic nature of current price pressures. This stands in contrast to goods prices, which have shown little upward momentum despite ongoing trade tensions.
Because price indexes can be volatile month-to-month, many economists prefer to look at the annualized rate over several months. On a six-month annualized basis, the price index is up 2.43 percent, matching the one-month rate in July and down from 2.64 percent as of June.
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