U.S. inflation stalls at 3.7% as GDP growth outlook improves

The U.S. personal consumption expenditures (PCE) price index rose 3.7% in the 12 months through July, unchanged from the previous month and above the 3.6% forecast of economists. Core PCE, which excludes food and energy, remained at 3.3% year-over-year and increased 0.2% month-over-month, also exceeding expectations.

Consumer spending in July decelerated modestly and essentially kept pace with inflation, while personal incomes grew faster than price gains, a combination that could support higher consumption later in the year. Orders for major capital goods, especially transportation equipment, rebounded, and durable-goods shipments outside defense and aerospace indicated continued investment in artificial-intelligence-related equipment.

Corporate profits rose by $400.9 billion in the second quarter, the second-largest quarterly increase on record, and business investment remained robust. The Bureau of Economic Analysis revised up the contribution of consumer spending to GDP to 3.4% and raised final sales to private domestic purchasers to 4.2%, the highest since early 2023.

Economists see the data pointing to a third-quarter real GDP growth rate of at least 3%, roughly double the 1.5% annualized rate recorded in the second quarter. "The July consumer spending and core durable goods shipments data point to a strong real GDP growth rate in Q3 that looks to be running at least 3%," said Kathy Bostjancic, chief economist at Nationwide.

The figures come ahead of Federal Reserve Chairman Kevin Warsh's keynote at the Jackson Hole symposium, where policymakers will assess whether inflation, still well above the 2% target, warrants a rate hike. "As Jackson Hole beckons, the Fed's challenge is clear: It still has considerable ground to cover before markets see 2% inflation as a credible outcome rather than a distant aspiration," said Olu Sonola, head of U.S. economics at Fitch Ratings.

Fed funds futures indicated about a 40% chance of a rate increase at the September meeting, up from roughly 36% before the report. "This is data that supports a hike," said Omair Sharif, founder and president of Inflation Insights.

Inflation pressures have been influenced by geopolitical events and trade policies, including higher energy prices after air strikes in the Middle East and recent tariff measures on Canadian imports. Despite a slowdown from the 7.2% peak in June 2022, inflation remains above target, keeping the debate over monetary tightening alive.