Inflation remained mostly level in July, though some prices edged up

The Personal Consumption Expenditures index, a key inflation gauge used by the Federal Reserve to make interest-rate decisions, held steady in July according to new data from the Department of Commerce.

Prices across the U.S. rose at an annual rate of 2.6% last month, the same as in June and in line with economist forecasts. Core inflation, which excludes the more volatile food and energy categories, rose 2.9% from a year ago, up slightly from June's 2.8% and the highest since February, according to the report.

The figures illustrate why many Fed officials have been wary about cutting their benchmark interest rate. While inflation is much lower than the roughly 7% peak it reached three years ago, it remains above the central bank's 2% target.

Meanwhile, the report showed that consumer spending increased by 0.5% from June to July, the biggest increase since March, indicating that Americans are not pulling back on purchases, despite looming economic uncertainty. Spending jumped sharply for long-lasting goods such as cars, appliances and furniture, many of which are imported.

Harry Chambers, assistant economist at Capital Economics, said in a research note that the rise in the core inflation measure was due to a rise in core services, which rose 0.3% on a monthly basis. That suggests tariffs are having a "minimal impact on goods prices," he wrote.

Incomes rose 0.4% on a monthly basis, boosted by a healthy gain in wages and salaries, the report showed.

"We continue to expect core PCE inflation to peak at 3.3% at the turn of the year, before then easing to about 2.5% by the end of 2026," Samuel Tombs, chief U.S. economist with Pantheon Macroeconomics, said in a report.

Fed Chair Jerome Powell hinted in his Jackson Hole address earlier this month that policymakers are likely to cut its short-term rate for the first time December of 2024. But policymakers are expected to proceed cautiously, while Powell has emphasized that any future rate cuts will depend on the path of inflation.

"Today's in-line PCE Price Index will keep the focus on the jobs market," said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, in an email on Friday. "For now, the odds still favor a September cut."

When the Fed reduces its benchmark rate, it often — though not always — lowers borrowing costs for things like mortgages, car loans, and business borrowing. On the flip side, that can spark inflation if the economy grows too quickly.