Inflation has worsened since the US and Israel attacked Iran, sending energy prices spiralling.
Published On 26 Aug 2026
Inflation in the United States is holding steady well above the Federal Reserve’s 2 percent target for the 65th straight month, intensifying the debate about whether the US central bank should hold or increase interest rates.
The Personal Consumption Expenditures (PCE) Price Index was 3.7 percent in the 12 months through July, unchanged from June, the Bureau of Economic Analysis in the US Department of Commerce said on Wednesday. Economists polled by the Reuters news agency had forecast a reading for the PCE, which the Fed uses to set its benchmark interest rate, of 3.6 percent.
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The month-over-month figure also came in higher than expected at 0.2 percent after falling 0.1 percent in June, which had been the weakest reading since April 2020. Economists had forecast a 0.1 percent increase in July.
Excluding energy and food prices, the so-called core PCE, which Fed officials use as a guidepost for inflation’s underlying run rate, held steady at 3.3 percent on the year while rising to 0.2 percent on the month from 0.1 percent in June.
Wednesday’s data boosted expectations that the Fed may raise interest rates as soon as next month. Fed funds futures prices reflected about a 42 percent probability of a rate hike at the central bank’s September 15-16 meeting after the report vs about 36 percent immediately before.
“This is data that supports a hike,” said Omair Sharif, founder and president of the forecasting firm Inflation Insights.
War and tariffs
Inflation has worsened since the US and Israel attacked Iran in late February, when it stood at 2.9 percent. The annual PCE shot to a three-year high of 4.1 percent in May with energy prices spiralling upwards as the conflict closed off roughly a fifth of global oil supplies.
Six months later, the conflict appears no closer to a final resolution although the exchange of fire has diminished and oil prices and the wider inflation wave they instigated have retreated from their mid-spring highs.
But consumer sentiment surveys showed that most US consumers are still gloomy about the economy and their finances.
A key reason is likely that inflation, even at lower levels, has eroded incomes. Wednesday’s data showed that compared with a year ago, inflation-adjusted incomes have risen just 0.2 percent after several months of declines.
And petrol prices have rebounded this month, which will likely push up inflation when the August figures are reported next month. Prices ticked up again overnight to $4.10 per gallon (3.8 litres) on average nationally, according to the American Automobile Association.
New tariff-induced pressures are also likely coming after trade negotiations between the US and its second-largest trading partner, Canada, fell apart on Friday, resulting in new levies on $20bn of Canadian products. Since then, Washington and Ottawa have each announced additional retaliatory measures to go into effect in the coming months unless a deal is reached to avert them.
