Washington, D.C. – August 29, 2025 – The U.S. Bureau of Economic Analysis reported Friday that core Personal Consumption Expenditures (PCE) inflation climbed to 2.9% in July 2025, marking the highest annual rate since February and signaling persistent price pressures despite the Federal Reserve’s recent rate cuts. The headline PCE index rose 2.6% year-over-year, aligning with economist expectations but underscoring the Fed’s challenge in balancing its 2% target amid President Donald Trump’s expansive tariff regime. This uptick, up 0.1 percentage point from June’s 2.8%, has fueled debates over the impact of trade policies on consumer costs, with core services inflation driving much of the increase. As markets digest the data ahead of the Fed’s September meeting, the report highlights a resilient economy but raises concerns about sustained inflation eroding recent progress.
Breakdown of the July PCE Report
The PCE price index, the Federal Reserve’s preferred gauge of inflation, measures changes in prices for a broad basket of goods and services consumed by households. In July, the core PCE – excluding volatile food and energy – advanced 0.3% month-over-month, matching forecasts and pushing the annual rate to 2.9%, the highest since February’s 3.0%. Headline PCE rose 0.2% monthly and 2.6% annually, held in check by a 2.7% annual decline in energy prices, including a drop in gasoline costs.
Services prices, which account for over 60% of the index, surged 3.6% year-over-year, reflecting higher costs in housing, healthcare, and transportation. Goods prices, meanwhile, increased just 0.5%, with tariff-impacted categories like apparel and household furnishings showing modest gains. Food prices rose 1.9% annually, down from June, while energy’s decline provided some relief. Consumer spending, a key driver of inflation, grew 0.5% in July, in line with expectations, supported by a 0.4% rise in personal income.
The report’s timing is critical, coming days after Fed Chair Jerome Powell’s Jackson Hole speech hinting at a September rate cut. Powell noted the “shifting balance of risks” in the economy, with unemployment at 4.2% and tariff effects “clearly visible” on prices. Markets reacted with Treasury yields holding steady and stock futures dipping slightly, as traders price in an 89% chance of a 25-basis-point cut next month.
Tariff Policies and Inflationary Pressures
The 2.9% core rate’s resurgence ties directly to Trump’s trade agenda, implemented since his January 2025 inauguration. In April, the administration imposed a 10% baseline tariff on all imports, followed by reciprocal duties on partners like the EU (30%), China (up to 50%), and Canada (25% on autos). These measures, aimed at protecting domestic industries, have filtered into consumer prices, particularly for imported goods. Economists at Oxford Economics estimate tariffs could add $2,600 annually to household costs, with core goods inflation at 1.2% – the fastest in over two years – as evidence.
Michael Pearce, deputy chief U.S. economist at Oxford, noted, “We expect it will rise further to a peak of 3.8% by year-end as tariffs bleed through more fully.” Household furnishings jumped 0.7% monthly, apparel 0.1%, and toys 0.2%, per BLS data cross-referenced with PCE trends. White House Council of Economic Advisers Chair Stephen Miran countered on CNBC, claiming “no evidence whatsoever” of tariff-driven inflation, attributing rises to “global supply chain adjustments.” Critics, including Moody’s chief economist Mark Zandi, point to “clear tariff fingerprints” in the data, warning of stagflation risks if combined with the July jobs report’s mere 73,000 additions and 4.2% unemployment.
This echoes earlier 2025 trends: February’s core PCE hit 2.9%, but eased to 2.8% in June before July’s rebound. The Fed’s three rate cuts since January – totaling 75 basis points – aimed to counter these pressures, but Powell emphasized in Jackson Hole that “tighter immigration policy has led to an abrupt slowdown in labor force growth,” complicating the dual mandate of price stability and maximum employment.
Economic Context and Fed Implications
July’s data paints a mixed picture: resilient consumer spending amid higher prices suggests economic strength, but stagnant real wages (down 0.1% inflation-adjusted) and tariff-induced cost hikes strain households. The broader economy grew 2.1% annualized in Q2, per advance GDP estimates, but Trump’s policies – including EU tariffs threatened for August 1 – risk further inflation. Consumer confidence dipped to 66.4 in July, per the Conference Board, reflecting tariff anxieties.
For the Fed, the 2.9% reading tempers September cut expectations. While Powell’s speech boosted odds to 89%, core PCE’s persistence above 2% may prompt a “higher for longer” stance. Analysts like Ellen Zentner of Morgan Stanley Wealth Management said, “Inflation is on the rise, but not hot enough to derail a September cut – though tariffs could prolong the process.” Futures now see two cuts by year-end, down from three pre-report.
This aligns with global trends: Canada’s CPI at 2.8%, the UK’s at 3.8% (highest since early 2024), and India’s at 2.82% (lowest since February 2019). In the U.S., food inflation at 2.9% – driven by beef, sugar, and eggs – mirrors ERS forecasts of 2.9% for all food in 2025.
Broader Impacts on Consumers and Markets
Households feel the pinch: Grocery prices fell 0.1% monthly but rose 2.2% annually, with restaurant costs up 3.9%. Low-income families, per Bankrate, cut dining out by 44%, exacerbating fast-food slumps at chains like Wendy’s. Mortgage rates dipped to 6.42% post-Jackson Hole, but persistent inflation could reverse gains, with median home prices at $396,500 amid low inventory.
Markets showed muted response: The S&P 500 futures fell 0.2%, while 10-year Treasury yields held at 3.8%. Trump’s economic approval slipped to 37%, per recent polls, as tariffs – projected to cost $2,600 per household – clash with his “booming economy” narrative. Posts on X from @EconTalker highlight “tariff fingerprints all over the report,” while @ScottBessent defends revenues funding growth.
Outlook and Policy Recommendations
Looking ahead, August PCE (due September 27) and jobs data will shape the Fed’s path. Oxford forecasts core PCE peaking at 3.8% by December, potentially delaying cuts. Policymakers may eye targeted relief, like exempting essentials from tariffs, though Trump’s August 1 EU deadline looms. For consumers, experts advise budgeting for 3%+ inflation through 2025, per USDA’s food outlook.
The 2.9% rise underscores tariffs’ double-edged sword: protecting jobs but inflating costs. As Powell navigates this, the Fed’s independence – tested by Trump’s calls for 3-4% cuts – remains key to stability.