US Inflation Holds at 3.7% in July, Above Fed Target

  US Inflation Holds at 3.7% in July, Above Fed Target

## Introduction: The War Premium That Won't Go Away

It has been 65 straight months — more than five years — since inflation has been at or below the Federal Reserve's 2% target. The last time it was there, COVID-19 was still

a global emergency, and the word "Iran" wasn't yet synonymous with $4-a-gallon gas.

On Wednesday, August 26, the Bureau of Economic Analysis delivered the latest reminder that this inflation fight is far from over. The Personal Consumption Expenditures (PCE) price index — the Federal Reserve's preferred inflation gauge — rose 3.7% in the 12 months through July, unchanged from June and above the 3.6% economists had forecast.

On a monthly basis, PCE rose 0.2%, reversing June's 0.1% decline and coming in higher than the 0.1% increase Wall Street had expected. Core PCE, which strips out volatile food and energy prices, held steady at 3.3% year-over-year, matching forecasts — but the monthly core reading accelerated to 0.2% from 0.1% in June.

The headline figure was driven by one unmistakable force: **the Iran war**. Since the U.S. and Israel launched strikes against Iran in late February, energy prices have spiraled, with gasoline up 24.6% over the past year and fuel oil rising 39.1%. The conflict has effectively shut down roughly a fifth of global oil supplies through the Strait of Hormuz. Six months later, the fighting has diminished but the peace remains elusive — and so does the inflation relief American families have been waiting for.

This isn't just a number on a government spreadsheet. It's the difference between filling up the tank and skipping a meal. It's the reason 43% of Americans have cut back on dining out. It's why 80% of households have changed their spending habits, according to recent surveys. And it's the backdrop against which Federal Reserve Chair Kevin Warsh will deliver his first Jackson Hole keynote address on Friday — a speech that could determine whether the "debasement trade" in gold and Bitcoin continues or collapses.

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## The Numbers: What the July PCE Report Actually Says

### Headline PCE: 3.7% — A Clear Miss

The headline figure was unambiguous: inflation isn't cooling as fast as anyone hoped.

| Metric | July 2026 | June 2026 | Forecast | 

|--------|-----------|-----------|----------|

| **Headline PCE (Monthly)** | +0.2% | -0.1% | +0.1% |

| **Headline PCE (Annual)** | 3.7% | 3.7% | 3.6% |

| **Core PCE (Monthly)** | +0.2% | +0.1% | +0.2% |

| **Core PCE (Annual)** | 3.3% | 3.3% | 3.3% |

Source:

The headline beat was driven by a rebound in prices after June's decline, which had been fueled by a drop in energy costs. July reversed that pattern, with headline prices returning to monthly growth.

### Core PCE: 3.3% — Stuck in Neutral

The core PCE price index — which excludes food and energy and is widely regarded within the central bank as a more useful guide to where prices are headed — rose 0.2% on the month and 3.3% on an annual basis.

The underlying trend has barely moved for months. Core inflation has now held at 3.3% in three of the past four months, producing almost no net improvement since April.

### The Unrounded Reality

The data was in some ways worse than it looked when rounded to the tenths of a percent. Unrounded, the core PCE price index rose **0.246%**, just missing a rounding-up to 0.3%. The 12-month core inflation rate came in at **3.344%**, toward the higher end of forecasts.

There is, however, one piece of decent news: the Fed cares most about market-based prices. The inflation data was stronger partly because non-market-based portfolio management fees — which move with the S&P 500 — added to inflation last month. Market-based core prices rose just 0.15% on the month and **3.025%** over 12 months.

### Goods vs. Services: The Divergence That Matters

The breakdown reveals a familiar and troubling pattern:

**Goods prices actually declined** on the month, off 0.1%, driven by a 2.7% decrease in gasoline and other energy-related goods and a 0.9% drop in furnishings and long-lasting household equipment.

**Services prices rose 0.3%**, pushed by a 1.2% increase in financial services and insurance as well as a 0.3% gain in housing.

This divergence is critical. While goods deflation provides some relief, the persistent rise in services prices — particularly in categories like insurance and housing — keeps core inflation elevated. And services inflation tends to be stickier because it's driven by wages, which are slow to adjust.

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## The War Premium: Why Inflation Is Stuck

### The Iran Factor

Inflation has worsened since the U.S. and Israel attacked Iran in late February, when it stood at 2.9%. The annual PCE shot to a three-year high of 4.1% in May with energy prices spiraling upward as the conflict closed off roughly a fifth of global oil supplies.

The Strait of Hormuz — through which roughly one-fifth of global oil and LNG supply normally passes — has been effectively shuttered. Before the war, roughly 130 vessels crossed daily. Today, that number has fallen to a fraction. Gasoline prices are up 24.6% over the past year. Fuel oil has risen 39.1%. Airline fares have climbed 25.5%.

Six months later, the conflict appears no closer to a final resolution. The exchange of fire has diminished and oil prices have retreated from their mid-spring highs, but the underlying geopolitical risk remains. In fact, new tariff-induced pressures are likely coming, after trade negotiations between the U.S. and Canada fell apart on August 21, resulting in new levies on $20 billion of Canadian goods.

### The CPI vs. PCE Divergence

The July CPI report showed headline inflation at 3.4% year-over-year, down from 4.2% in May, and core CPI at 2.5%, down from 2.9%. But the PCE gauge — the Fed's preferred measure — runs notably higher at 3.7% headline and 3.3% core, reflecting its heavier weighting toward services and healthcare costs.

This divergence complicates the Fed's assessment of underlying price pressures. The two measures tell slightly different stories, but both agree on the central point: inflation remains well above target.

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## The Consumer's Reality: Stagnant Spending, Rising Anxiety

### Income Grows, Spending Stalls

One of the most revealing aspects of the July report is the disconnect between income and spending.

Personal income rose **0.4%** in July, a solid showing. But personal consumption expenditures increased just **0.2%**, with real PCE — adjusted for inflation — rising less than **0.1%** — grinding to near stagnation.

The personal savings rate ticked up to 3%. In simple terms, American consumers are responding to positive income growth with **near-zero real spending growth**, driving the savings rate higher.

This is not a collapse in consumption, but a structural shift in consumer behavior — people are no longer blindly accepting price hikes and are reprioritizing their spending. Consumers are being "selective" in their spending, not "stopping" it.

### The Breakdown: Services Up, Goods Down

Net personal spending increased by $36.3 billion month-over-month in July, with spending on services surging by $86.2 billion, while spending on goods fell by $49.9 billion.

The categories with the highest spending growth were concentrated in financial services and insurance, healthcare, and housing — areas with stronger essential demand characteristics. This is the hallmark of a consumer under pressure: essential spending continues, discretionary spending gets cut.

### Consumer Confidence at a Seven-Month Low

The Conference Board's consumer confidence index fell to a seven-month low of 89.4 in August, weaker than the 90.3 expected. Consumer sentiment surveys show that most U.S. consumers are still gloomy about the economy and their finances.

A key reason is likely that inflation, even at lower levels, has eroded incomes. Wednesday's data showed that compared with a year ago, inflation-adjusted incomes have risen just 0.2% after several months of declines. And petrol prices have rebounded this month, which will likely push up inflation when the August figures are reported next month.

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## The Fed's Dilemma: To Hike or Not to Hike?

### The Unwelcome Number for Warsh

The PCE data gave Federal Reserve Chair Kevin Warsh an unwelcome number to carry into Friday's Jackson Hole keynote. Markets had been hoping for a more dovish signal. Instead, they got a reminder that inflation remains stubbornly high.

The data lands as rate futures price a **63.9% probability of no change** and a **36.1% chance of a 25-basis-point hike** at September's FOMC meeting, according to CME FedWatch. After the report, fed funds futures reflected about a **42% probability** of a rate hike, up from about 36% immediately before.

The July FOMC meeting was split, with three officials voting to raise rates by a quarter point. The minutes noted that most officials anticipated inflation would "step down over the rest of the year." However, "many" saw the possibility it could remain elevated. "Many participants assessed that policy tightening would likely be necessary if inflation did not decline," the minutes added.

### The Jackson Hole Wild Card

Warsh is scheduled to speak at the Jackson Hole Economic Symposium on Friday, where investors will scrutinize his remarks for clues about the September path. Warsh has already signaled a preference for less forward guidance, declining to submit an individual rate projection in the latest dot plot.

"This wasn't just any PCE report — it was the PCE report before Kevin Warsh's Jackson Hole keynote, which could make or break the resurrection of the debasement trade," said Nic Puckrin, macro analyst and founder of Coin Bureau.

"If Warsh's speech on Friday leans hawkish, this could derail the gold and Bitcoin rally we've seen over the past week, and put further pressure on the AI trade that's been propping up the stock market," Puckrin added.

### What the Experts Are Saying

The expert reaction was mixed, reflecting the Fed's own internal divide:

**Jamie Cox, managing partner at Harris Financial:** "Inflation is annoyingly sticky right now, but not enough to move the Federal Reserve to hike. Given that the methodology used to calculate PCE will change next month, it's highly likely PCE trends lower soon. Either way, the Federal Reserve isn't hiking this year."

**Omair Sharif, founder of Inflation Insights:** "This is data that supports a hike."

**Jeffrey Roach, chief economist at LPL Financial:** "An inflection point may be approaching, but for now consumers continue to benefit from income growth that is outpacing inflation. Services inflation remains elevated, though there are signs of improvement. For policymakers, the balance of risks still tilts toward inflation. If geopolitical tensions ease in the near term, core inflation could fall below 3%."

**Ariane Curtis, senior North America economist at Capital Economics:** "The slightly above-target-consistent rise in the core PCE deflator in July won't be enough to convince the Fed that they'll need to hike rates as soon as September. But with the annual rate still at 3.3% and given our relatively upbeat forecast for growth and the labour market, it remains a matter of when – not if – rates are raised. In our view, that is a 25bp hike in December, followed by another early next year."

**Chris Zaccarelli, chief investment officer for Northlight Asset Management:** "Although many of the PCE numbers were worse than expected, the most important one – YoY Core PCE – held constant and that will give the Fed more time to leave rates on hold."

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## What This Means for American Families

### Borrowing Costs: Higher for Longer

For American families, the PCE report reinforces a sobering reality: **borrowing costs are likely to remain elevated**.

The Fed's benchmark rate sits at 3.50% to 3.75%, and the odds of a rate cut in the near term have diminished. That means:

- **Mortgage rates** are likely to remain elevated. With the 10-year Treasury yield near 4.65%, 30-year mortgage rates are well above 6.5%.

- **Credit card rates** will stay high, making it more expensive to carry debt.

- **Auto loan rates** will remain elevated, adding to the cost of buying a car.

- **Business borrowing costs** will stay high, potentially slowing investment and hiring.

### The Savings Squeeze

For savers, the picture is more mixed. Higher interest rates mean better returns on savings accounts, CDs, and money market funds. But inflation at 3.7% still eats into purchasing power. The real return on savings — the interest rate minus inflation — remains modest for most savers.

### Real Incomes: Barely Growing

Compared with a year ago, inflation-adjusted incomes have risen just 0.2% after several months of declines. For most American families, that means their paychecks aren't keeping up with the cost of living.

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## Frequently Asked Questions (FAQs)

### 1. What is the PCE price index and why does the Fed prefer it?

The Personal Consumption Expenditures (PCE) price index is the Federal Reserve's preferred inflation gauge. It measures the prices consumers pay for a wide range of goods and services. The Fed prefers it over the Consumer Price Index (CPI) because it accounts for changes in consumer behavior — when prices rise, consumers may switch to cheaper alternatives, and PCE captures that substitution effect.

### 2. What were the July 2026 PCE numbers?

Headline PCE rose 0.2% monthly and 3.7% annually, both 0.1 percentage point above forecasts. Core PCE, which excludes food and energy, rose 0.2% monthly and 3.3% annually, matching expectations.

### 3. Why is core PCE more important than headline PCE?

Core PCE excludes volatile food and energy prices, which can fluctuate significantly due to factors like weather or geopolitical events. By stripping out these volatile components, core PCE provides a clearer picture of underlying inflation trends.

### 4. What does this mean for the Federal Reserve's next move?

The report keeps a September rate hike firmly on the table. Markets are pricing a 36.1% probability of a rate hike in September and a 45.4% chance by December.

### 5. How did the stock market react?

Stocks were mixed. The S&P 500 closed roughly flat on the day, with investors weighing sticky inflation against softening consumer data.

### 6. What is the Jackson Hole symposium and why does it matter?

Jackson Hole is the Federal Reserve's annual economic policy symposium. Fed Chair Kevin Warsh delivers a keynote speech on Friday, August 28. Markets are looking for clarity on how the Fed plans to respond to stubborn inflation.

### 7. How does this affect mortgage rates?

Higher inflation and sticky core PCE readings keep upward pressure on Treasury yields, which in turn push mortgage rates higher. With the 10-year Treasury yield near 4.65%, 30-year mortgage rates remain well above 6.5%.

### 8. Will the Fed cut rates in 2026?

Most analysts now expect rate cuts to be pushed further out. Capital Economics sees a 25bp hike in December, followed by another early next year. Others believe the Fed won't hike at all this year. The path forward remains uncertain.

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## Conclusion: The Long Road Back

The July PCE report is a reality check — a reminder that the path back to 2% inflation is longer and bumpier than anyone hoped.

The numbers are clear: inflation has held at 3.7% for two straight months. Core inflation has barely moved since April. The war premium — the energy-driven inflation surge triggered by the Iran conflict — is stubbornly persistent.

For American families, the implications are direct and personal. Borrowing costs are likely to remain elevated. Mortgage rates, credit card rates, and auto loan rates will stay high. The savings squeeze will persist. And the path to financial stability will require patience, discipline, and careful planning.

For the Federal Reserve, the job is far from done. Inflation has been above target for 65 straight months. The central bank faces a difficult choice: raise rates to cool inflation and risk slowing the economy further, or hold steady and hope that inflation moderates on its own.

As one economist put it: "This is data that supports a hike." Whether the Fed will act on that data — and when — is the question that will shape the economic landscape for the rest of 2026 and beyond.

The long road back to 2% is still ahead of us. And it's going to take longer than anyone expected.

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## Disclaimer

*This article is for informational and educational purposes only and does not constitute financial, investment, tax, or legal advice. All views expressed are based on publicly available information as of August 27, 2026. Economic conditions, inflation rates, and Federal Reserve policy are subject to change. The author does not endorse any specific investment strategies or products. Past performance is not indicative of future results. Before making any financial or investment decisions based on the content of this article, please consult with qualified professionals who can evaluate your specific situation.*