The Federal Reserve’s preferred inflation indicator, the Personal Consumption Expenditures (PCE) Price Index, showed little change in July, providing a mixed picture of the U.S. economy. The index remained at an annual rate of 2.6%, the same pace recorded in June. While headline inflation held steady, the measure excluding volatile food and energy costs—known as core PCE inflation—moved higher. It climbed 0.3% month-over-month and reached 2.9% year-over-year, its fastest pace since February.
This divergence highlights the challenge facing policymakers. Headline inflation, down sharply from a peak of nearly 7% in 2022, suggests broad progress. Yet the firming of core pressures signals that price stability has not fully returned. The Federal Reserve has repeatedly stated that it monitors core PCE closely, as it provides a clearer view of long-term inflation trends that can influence wages, rents, and services costs.
Consumer Spending and Income Growth
Despite persistent inflation concerns, U.S. households continued to spend. Consumer spending increased 0.5% in July, the largest rise in four months, pointing to resilient demand. Purchases of motor vehicles, clothing, food, and recreational goods played a central role, while spending on services expanded by 0.4%, supported by healthcare, housing, and financial services.
The spending momentum coincided with rising incomes. Personal incomes increased by 0.4%, fueled by higher wages and salaries. Economists note that steady job growth earlier in the year helped sustain disposable income levels, though the labor market has recently shown signs of cooling. In July, only 73,000 jobs were added nationwide, a figure well below expectations, and the unemployment rate rose to 4.2%, its highest level in over two years.
While household spending continues to drive overall economic growth, the balance between rising incomes and higher prices remains delicate. Analysts caution that if inflation accelerates again, consumers may scale back, especially if wage growth slows in the coming months.
Tariff-Related Pressures and Trade Deficit
Rising tariffs under the administration of President Donald Trump are contributing to inflationary pressures. Businesses report higher import costs, particularly in sectors reliant on foreign inputs, including automobiles, electronics, and furniture. These costs have translated into higher consumer prices and are expected to intensify as tariffs expand later in the year.
The trade balance also reflected the impact of tariff-driven shifts. The goods trade deficit widened by 22.1% in July to $103.6 billion, as imports rose while exports slowed. Economists suggest that companies may have accelerated shipments ahead of tariff deadlines, temporarily boosting imports. At the same time, exports have faced challenges from weaker global demand and retaliatory trade measures.
These developments add complexity to the inflation outlook. While tariffs are intended to protect domestic industries, they often act as a tax on consumers and businesses. The additional pressure from supply chains and inventories may keep prices elevated well into the second half of the year.
Broader Economic Dynamics
The wider economy has shown signs of resilience. Government data confirmed that real GDP expanded by 3.3% annualized in the second quarter, a sharp rebound from the 0.5% contraction reported in the first quarter. The rebound was attributed in part to a reduction in imports, which had been elevated earlier in the year as firms sought to avoid impending tariffs.
Nevertheless, the durability of growth remains uncertain. Investment in inventories continued to fall, and government spending contracted, limiting some of the strength from consumer demand. Business investment, particularly in equipment and structures, also showed uneven trends, reflecting caution among corporate executives facing higher borrowing costs and geopolitical uncertainty.
Despite these headwinds, the expansion provided temporary relief to policymakers concerned about a possible slowdown. Yet the underlying data suggests that growth remains highly sensitive to trade flows and consumer spending patterns, both of which are vulnerable to inflationary and tariff-related pressures.
Recent Economic Context
Beyond the inflation and GDP figures, recent indicators underline the complexity of the economic environment. The Conference Board’s Consumer Confidence Index declined in August to 97.4, reflecting public concern over rising prices, tariffs, and labor-market weakness. A decline in confidence can weigh on spending, particularly for big-ticket items.
Retail sales, however, offered a temporary boost. July sales increased by 0.5%, driven by purchases of automobiles and furniture. Some economists attribute the rise to households buying ahead of tariff-driven price increases, a trend that could fade if costs continue to climb. At the same time, wholesale inflation picked up, hinting that consumer prices may face additional upward pressure in coming months.
Financial markets have responded with caution. Treasury yields edged higher as investors reassessed the Fed’s path, while equity markets experienced volatility amid uncertainty over tariffs and consumer demand. Analysts note that the central bank remains cautious about cutting interest rates too soon, with officials pointing to core inflation as a primary concern.