Inflation has worsened since the US and Israel attacked Iran, sending energy prices spiralling.
Published On 26 Aug 2026
Inflation in the United States remained persistently above the Federal Reserve’s 2 percent target for the 65th consecutive month, reigniting discussions about whether the central bank should maintain or raise interest rates.
The Personal Consumption Expenditures (PCE) Price Index registered 3.7 percent over the 12 months ending in July, matching June’s reading, according to the Bureau of Economic Analysis within the US Department of Commerce, which released the data on Wednesday. Economists surveyed by Reuters had projected a 3.6 percent PCE figure, which the Fed relies upon to establish its benchmark interest rate.
The month-over-month increase also surpassed expectations, climbing 0.2 percent following a 0.1 percent decline in June—the latter representing the weakest reading since April 2020. Analysts had anticipated a 0.1 percent rise for July.
Excluding the volatile categories of food and energy, the core PCE measure—which Fed officials monitor to gauge underlying inflation—remained at 3.3 percent on an annual basis, while edging up to 0.2 percent monthly from 0.1 percent in June.
Wednesday’s release heightened expectations that the Fed could implement an interest rate increase as early as next month. Fed funds futures pricing indicated approximately a 42 percent likelihood of a rate hike at the central bank’s September 15-16 meeting following the report, compared to around 36 percent beforehand.
“This is data that supports a hike,” remarked Omair Sharif, founder and president of the forecasting firm Inflation Insights.
War and tariffs
Inflation has deteriorated since the US and Israel launched attacks on Iran in late February, when the rate stood at 2.9 percent. The annual PCE surged to a three-year peak of 4.1 percent in May as energy prices escalated dramatically, driven by the conflict’s disruption of approximately one-fifth of global oil supplies.
Six months on, the conflict shows no signs of approaching resolution, though active hostilities have diminished and both oil prices and the broader inflationary surge they triggered have receded from their mid-spring peaks.
Nevertheless, consumer sentiment surveys indicate that most Americans remain pessimistic about economic conditions and their personal financial situations.
A significant contributing factor is likely that inflation, even at moderated levels, has diminished purchasing power. Wednesday’s data revealed that inflation-adjusted incomes have grown by just 0.2 percent compared to the previous year, following several months of decline.
Additionally, gasoline prices have rebounded this month, likely contributing to higher inflation readings when August figures are released next month. Prices rose again overnight to a national average of $4.10 per gallon, according to the American Automobile Association.
Fresh tariff-related pressures are also anticipated following the collapse of trade negotiations between the US and Canada—its second-largest trading partner—on Friday, which resulted in new levies on $20 billion worth of Canadian goods. Since then, both Washington and Ottawa have announced additional retaliatory measures scheduled to take effect in the coming months unless an agreement is reached to prevent them.
