A federal inflation measure remained at 3.7% in July, with persistent high prices for services and gas affecting American families. Upcoming changes to how inflation is calculated could lower future readings, but relief remains uncertain.
Inflation pressures continued to challenge American households in July, as a key federal measure showed prices holding steady at elevated levels. The personal consumption expenditures (PCE) price index, closely monitored by the Federal Reserve, reported a 3.7% increase compared to the previous year, matching June's rate and remaining well above the Fed's 2% target.
Despite a recent dip in gas prices, the overall cost of living has not eased for many families. Service expenses-including health care, utilities, and financial services-rose sharply, offsetting any relief at the pump. The Commerce Department's latest data highlights that inflation has accelerated since the U.S. and Israel's military actions in Iran earlier this year, when the annual rate was 2.9%.
Service Costs and Tariffs Drive Persistent Inflation
While gas prices briefly fell, other factors have kept inflation stubbornly high. President Donald Trump's threats of new tariffs on Canada and China, along with increased spending on artificial intelligence infrastructure, have contributed to higher prices for computers, gaming consoles, and semiconductors. The PCE index, which gives less weight to rental costs than the consumer price index (CPI), has been running hotter than the CPI, especially as rental prices have cooled in recent months.
Core inflation, which excludes volatile food and energy prices, also remained unchanged at 3.3% in July. This figure had dropped to 2.6% before President Trump imposed sweeping tariffs in April 2025. On a month-to-month basis, both overall and core prices rose 0.2% from June to July, a pace that some Federal Reserve officials see as a sign inflation could eventually return to target levels if sustained.
Upcoming Changes to Inflation Measurement
Economists have pointed out that the PCE index may overstate inflation due to its methods for calculating financial advice and software costs. The Commerce Department plans to revise these calculations starting next month, which is expected to lower the annual PCE inflation rate by about 0.2 percentage points. These adjustments aim to better reflect what consumers actually pay for services and to exclude some business-related software spending that currently inflates the index.
Even with these changes, many Americans continue to feel the pinch. Inflation-adjusted incomes have barely increased-up just 0.2% over the past year after several months of decline. Gas prices have also rebounded in August, with the national average reaching $4.10 per gallon, suggesting that next month's inflation report may show another uptick.
Consumer Spending and Economic Outlook
Consumer spending remained robust in the April-June quarter, according to government data, with businesses investing heavily in AI infrastructure. However, economic growth slowed to 1.5% in the second quarter, as much of the business investment went toward imports rather than domestic production. In July, inflation-adjusted consumer spending was flat, indicating that households may be growing more cautious as high prices persist.
The Federal Reserve remains divided on how to respond. Most officials are willing to keep interest rates steady to see if inflation cools on its own, but some support further rate hikes to slow borrowing and spending. New Fed Chair Kevin Warsh is expected to address these issues in a closely watched speech in Jackson Hole, Wyoming, later this week.
Impact on Borrowing and Financial Markets
Persistent inflation has pushed long-term interest rates higher, raising borrowing costs for mortgages, auto loans, and credit cards. The yield on 30-year Treasury bonds recently hit a 19-year high, prompting Treasury Secretary Scott Bessent to announce a doubling of government buybacks of longer-term bonds in an effort to stabilize rates. While the move had little immediate effect, yields have since edged down slightly.
As the midterm elections approach, high prices remain a central concern for voters. State election officials have also raised alarms about federal support and cooperation, as highlighted in a recent report on election security tensions. With inflation showing few signs of rapid improvement, economic issues are likely to remain at the forefront of public debate in the months ahead.
The Commerce Department's planned revisions to inflation measurement may offer some statistical relief, but for many Americans, the cost of everyday essentials continues to strain household budgets. Policymakers and residents alike will be watching closely to see whether upcoming changes and policy decisions can bring meaningful relief.
