Annual inflation in the US unexpectedly remained unchanged in July, staying well above the Federal Reserve’s target of 2% for the 65th consecutive month. The pause in inflation decline after the recent peak caused by the war with Iran is likely to intensify discussions within the central bank on whether to raise interest rates or keep them steady.
The Personal Consumption Expenditures (PCE) price index, which the Federal Reserve uses to measure inflation, rose by 3.7% over the 12 months to July, unchanged from June. This was reported on Wednesday by the Bureau of Economic Analysis of the US Department of Commerce. Economists polled by Reuters had forecast a PCE increase of 3.6%.
US GDP remained unchanged
Also on Wednesday, the Bureau of Economic Analysis updated data on economic growth in the second quarter, leaving unchanged the estimate of annual gross domestic product (GDP) growth at 1.5%.
On a monthly basis, PCE rose by 0.2% in July, also exceeding economists’ forecasts, after a decline of 0.1% in June — the weakest figure since April 2020.
Impact of war and tariffs on inflation
PCE quickly reached a three‑year high of 4.1% in May after President Donald Trump, together with Israel, launched airstrikes on Iran at the end of February. This sparked a sharp rise in energy prices as the conflict blocked about one‑fifth of global oil supplies.
Six months later, the conflict still shows no sign of a final resolution, although the intensity of hostilities has eased and oil prices, along with the inflation wave they triggered, have retreated from the mid‑spring peaks.
The decline in inflation over the past two months has strengthened the arguments of most members of the Federal Open Market Committee, who voted in July to keep rates in the range of 3.50% to 3.75%, where they have been since December. However, the slow pace of improvement is unlikely to satisfy a growing minority of officials who argue that tougher policy is needed, as inflation has stayed above the target since February 2021 and will not fall to it without further monetary tightening.
Inflation, as measured by PCE, peaked at 7.2% in June 2022. The Federal Reserve’s most aggressive rate hikes since the 1980s helped bring it back toward 2%. Yet that trajectory shifted last year after Donald Trump, upon returning to the White House, introduced a series of import tariffs that lifted prices across a wide range of goods, and the war with Iran amplified this pressure.
New pressure from tariffs is likely to intensify after trade negotiations between the US and Canada, the United States’ second‑largest trading partner, collapsed on Friday. The fallout led to new duties on Canadian imports worth 20 billion dollars. Since then, Washington and Ottawa have announced additional retaliatory measures that will take effect in the coming months unless an agreement is reached.
Source: Reuters
