LDN Business - Key Inflation Gauge Elevated

Key inflation gauge remains elevated during Iran conflict and ongoing US trade fights

[August 27, 2026] By CHRISTOPHER RUGABER

WASHINGTON (AP) — An inflation measure closely watched by the Federal Reserve stayed elevated last month in the latest sign that many Americans are still struggling with higher costs.

Stubbornly high prices are shaping up to be a key issue in the midterm elections, now just 10 weeks away, particularly as the Iran war keeps gas prices high, President Donald Trump is threatening new tariffs on Canada and China, and spending on AI infrastructure has pushed up the cost of computers, gaming consoles, and semiconductors.

Inflation remained high in July even as gas prices fell, partly because the cost of services, including health care, utilities, and financial services, jumped. Yet the government plans to change the way it calculates the cost of some services starting with next month's figures, which could lower measured inflation.

Inflation remains elevated and above the Federal Reserve's target

The Commerce Department’s Wednesday report showed that prices rose 3.7% in July compared with a year earlier, the same as June. Inflation has worsened since the U.S. and Israel attacked Iran in late February, when it stood at 2.9%. It’s noticeably above the Fed’s target of 2%.

Wednesday's figures are from the personal consumption expenditures price index, a separate gauge from the more widely followed consumer price index, which was reported earlier this month. The PCE index is running hotter than the CPI, partly because it puts much less weight on rental costs, which have been cooling steadily in recent months.

Excluding the volatile food and energy categories, core inflation was also unchanged at 3.3% in July. It had fallen to 2.6% before President Donald Trump imposed sweeping tariffs in April 2025.

On a monthly basis, overall prices rose 0.2% from June to July, after declining 0.1% the previous month and jumping 0.5% in May. Core prices also moved up 0.2% from June to July, up from 0.1% in the previous month. Some Fed officials have said that core inflation running at about 0.2% a month would be a reassuring sign that inflation is heading back to the 2% target.

The inflation gauge will be revised lower next month

Many economists have noted that the PCE index has been pushed higher by the way it calculates the cost of financial advice, as well as how it measures prices for software and computer accessories. When stock markets rise, that translates into bigger gains in what the government calls “portfolio management services.” Yet that measure doesn't always fully capture what Americans actually pay for financial services.

At the same time, the PCE also likely captures some business-related spending on software, even though it should only focus on consumer spending, analysts say.

As a result, the Commerce Department has said it plans to adjust those measurements, among others, starting next month. Economists, who largely agree with the changes, forecast that they will reduce annual PCE inflation by 0.2 percentage point or so.

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Why do things still feel expensive?

Even as inflation has cooled from its post-pandemic highs — it topped 7% according to the Fed's preferred gauge in 2022 — consumer sentiment surveys show that most Americans 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 show that compared with a year ago, inflation-adjusted incomes have risen just 0.2%, after several months of decline.

And gas 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 on average nationally, according to AAA.

Consumers did boost their spending at a robust pace in the April-June quarter, according to a separate report released Wednesday, and businesses also strongly increased their investments, largely on the AI infrastructure buildout. The economy grew just 1.5% during the second quarter, however, as much of the business spending went towards imports.

But Americans may be turning more cautious as inflation stays high. Consumer spending, adjusted for inflation, was unchanged in July, the government said Wednesday.

How will this affect the inflation-fighters at the Federal Reserve?

The new inflation data is unlikely to fully resolve a split at the Fed, where most officials are willing to hold interest rates steady to see if inflation can cool on its own. But many Fed officials have supported raising rates in a bid to slow borrowing and spending to combat higher prices.

New Fed Chair Kevin Warsh will deliver a high-profile speech Friday in Jackson Hole, Wyoming, that will be closely watched by Wall Street for any signs of his thinking about next steps.

Persistent inflation has contributed to higher long-term interest rates, which have lifted borrowing costs for things like mortgages, auto loans, and credit cards. Many Wall Street analysts say that a lack of clarity from Warsh about how the Fed will respond to persistent inflation has also pushed up those rates. The yield on 30-year Treasury bonds briefly reached a 19-year high earlier this month, prompting an unusual intervention by Treasury Secretary Scott Bessent.

Bessent said the Treasury would double its buybacks of longer-term bonds — those lasting for 10 to 30 years — starting next month. Such a move would theoretically raise Treasury prices and lower yields. The announcement initially had little effect, though yields have since declined slightly.

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