US Inflation Hits Five-Year High at 3.7%, Worrying Fed and Markets

The US inflation rate remained stuck at 3.7% in July, matching June's pace and exceeding economists' forecasts of 3.6%. The personal consumption expenditures (PCE) price index rose 0.2% month over month, up from a 0.1% dip in June.

The core PCE index, which excludes volatile food and energy costs, climbed 3.3% year over year and 0.2% month over month. Energy prices jumped 15.3% from a year ago, driven by lingering supply shocks, while durable goods prices also contributed to the stronger-than-expected headline figure.

The inflation data arrived alongside a revised second-quarter real GDP reading of 1.5%, unchanged from the prior estimate. Consumer behavior showed signs of strain as inflation-adjusted spending was flat in July, down from a 0.4% gain in June.

Economists noted that the combination of sticky core inflation and weakening consumer momentum presents a delicate balancing act for policymakers. The Fed's next policy meeting will be closely scrutinized for any shift in tone as officials weigh the risks of acting too soon against the dangers of allowing inflation expectations to become unanchored.