Core prices in the United States rose 3.3% over the 12 months through July, the Commerce Department reported on August 26, leaving inflation well above the Federal Reserve’s 2% target and unsettling forecasts for the central bank’s next move.
The core personal consumption expenditures price index, which strips out volatile food and energy costs, is the gauge the Fed watches most closely when setting interest rates. Economists surveyed by Dow Jones had expected a 3.6% annual reading, making the actual figure a modest downside surprise.
The monthly increase came in near expectations. Economists had projected a 0.1% rise, and the report showed prices firming at a slightly elevated pace for the month.
The data leaves open the question of whether policymakers will adjust rates at their September meeting. A reading above target strengthens the case for caution, while the softer-than-forecast annual figure gives officials room to weigh a pause against further tightening.
The PCE index captures a broader basket of spending than the more widely cited consumer price index, which is why the Fed prefers it as a measure of underlying price pressure. Persistent core inflation has kept the central bank from declaring victory over the price surges of recent years.
The July report follows a run of mixed signals on the U.S. economy, with earlier data showing inflation cooling unevenly. Similar debates over stubborn core prices have played out at other central banks, including Japan’s response to accelerating core inflation.
Markets have been trading on every inflation print as investors try to gauge the timing of any rate change. The gap between the target and the current reading remains the central obstacle for officials seeking to loosen policy.
Fed policymakers next convene in September, when the latest inflation and labor figures will shape their decision on interest rates.