US inflation held at 3.7 percent in the year to July, unchanged from June and above the Federal Reserve’s 2 percent target, according to the Bureau of Economic Analysis. The reading marked the 65th consecutive month above the central bank’s goal.
The data strengthened expectations that the Federal Reserve could raise interest rates at its September 15–16 meeting, as policymakers weigh persistent price pressures against a weaker economic outlook.
Why the reading matters for interest rates
Economists surveyed by Reuters had expected annual PCE inflation to ease to 3.6 percent. The monthly increase also exceeded expectations: prices rose 0.2 percent in July after falling 0.1 percent in June, the weakest monthly result since April 2020.
Core PCE, which excludes food and energy and is used by Federal Reserve officials as a guide to underlying inflation, rose 0.2 percent during the month, up from 0.1 percent in June.
Energy, tariffs and household pressure
Inflation has risen from 2.9 percent in late February, when the United States and Israel attacked Iran. Annual PCE inflation reached 4.1 percent in May as energy prices climbed after the conflict closed off roughly a fifth of global oil supplies. Oil prices and the broader inflation surge have since retreated from their mid-spring highs, although the conflict has not reached a final resolution.
Household finances remain under pressure: consumer sentiment surveys show widespread gloom, while inflation-adjusted incomes have increased only 0.2 percent from a year earlier after several months of declines. National average petrol prices had also risen to $4.10 per gallon, according to the American Automobile Association. For additional context, see “US Economic Growth Slows to 1.5% in Q2 2026 Amid Inflation and Trade Pressures”.
Further pressure could come from tariffs. After trade negotiations between the United States and Canada broke down, new levies on $20bn of Canadian products were announced, alongside additional retaliatory measures that could take effect in coming months unless the two countries reach a deal.
What happens next
Fed funds futures put the probability of a rate increase at the September 15–16 meeting at about 42 percent after the inflation report, compared with about 36 percent beforehand; August inflation figures are expected to show whether petrol prices and tariffs add to the pressure.
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