Inflation Ticks Up as Tariffs Bite, but Shoppers Keep Spending

Prices climbed again in July, with the Federal Reserve’s favorite inflation gauge showing a bump that keeps the economy running hotter than the central bank would like.

The core personal consumption expenditures (PCE) price index — which strips out food and energy — rose 2.9% from a year earlier, up slightly from June and the fastest pace since February, according to Commerce Department data released Friday. On a monthly basis, core inflation rose 0.3%, right in line with forecasts.

For the Fed, which targets 2% inflation, that’s still too high. But with signs the labor market is weakening, most Wall Street analysts expect rate cuts at the Fed’s mid-September meeting.

“The Fed opened the door to rate cuts, but how wide it stays open depends on whether the labor market looks like a bigger risk than inflation,” said Ellen Zentner, chief economist at Morgan Stanley.

President Donald Trump’s 10% baseline tariff on imports — plus a slew of additional reciprocal duties — is starting to filter into consumer prices. The effects are clearest in furniture, appliances, and footwear, though services costs are also picking up.

So far, companies have cushioned the blow by relying on inventories stockpiled before tariffs hit. But those reserves are shrinking, forcing CEOs to choose between eating the extra costs or passing them on to shoppers.

Despite higher prices, Americans kept swiping their cards. Consumer spending rose 0.5% in July, driven by cars, financial services, and the usual summer sales splurge — Amazon Prime Day, back-to-school shopping, and more. Adjusted for inflation, spending was still up 0.3%, a solid gain.

Incomes also grew. Personal income climbed 0.4%, fueled by higher wages. That gave households enough cushion to keep spending even as prices inched up, though July marked the first month since March where spending outpaced income growth.

“This is an encouraging sign that American consumers are still willing to open their wallets when they see deals,” said Heather Long, chief economist at Navy Federal Credit Union.

Breaking down the price moves

• Energy prices dropped 2.7% from a year ago and slid 1.1% on the month, helping keep overall inflation in check.
• Food costs rose 1.9% year-over-year but actually dipped 0.1% in July.
• Services are doing the heavy lifting: up 3.6% annually, compared to just 0.5% for goods.

Fed officials are caught in a balancing act. Inflation hasn’t cooled to their comfort zone, but the bigger worry may be the slowing jobs market. Unemployment has held around 4.2%, but hiring momentum has cooled, and Trump’s immigration restrictions have reduced labor supply.

Fed Governor Christopher Waller said this week he supports a rate cut in September, possibly larger than a quarter point if job numbers look ugly. Chair Jerome Powell has also hinted the Fed is ready to act.

For now, Wall Street is betting on cuts — but July’s inflation report shows the Fed will need to tread carefully.

With input from CNN, CNBC, the New York Times, and Investor’s Business Daily.