No relief from inflation in July

August 26, 2026

The personal consumption expenditures (PCE) price index rose 0.2% in July and 3.7% from a year ago, matching June’s pace. Lower energy prices and a temporary easing in price gains provided some relief, though much of the decline in energy prices reversed in August. Grocery-store discounts were not enough to offset increases elsewhere.

The prospect of the Strait of Hormuz reopening pushed oil prices lower over the past week, but refining capacity remains stretched. That has lifted the cost of refined fuels and put a floor under gasoline and diesel prices. Diesel costs spill into a broad range of goods prices, typically with a lag of one to four months.

Food at home retreated slightly, as big-box discounters and large grocers used tariff refunds to lower prices on selected items. Lost business among low- and middle-income households prompted the rollbacks, which have been extended through year-end.

A trade war with Canada threatens production across the US, Canada and Mexico because their supply chains are so deeply integrated. It could provide further relief in oil prices, but for the wrong reason - weaker demand.

Core PCE, which strips out food and energy, rose 0.2% in July and held at a 3.3% pace from a year ago, matching June’s pace. It remains well above the Federal Reserve’s 2% target. Core inflation is not moving decisively lower; it is grinding sideways at a pace that is too hot for comfort. 

Price declines for home furnishings, appliances and other housing-related goods were not enough to offset increases in services. Consumer-electronics prices jumped as the data-center boom pushed up memory-chip costs. A September quality adjustment for electronics, reflecting advances in AI, should temper some of those gains.

The supercore services measure, which excludes shelter and energy services, rose 0.3% in July and was up 3.9% from a year ago. That is the piece of the inflation puzzle that worries the Federal Reserve most. It is less directly affected by swings in food, energy and goods prices and more reflective of labor costs, insurance, medical care, financial services and other categories where increases can become embedded. 

Childcare and in-home eldercare services both accelerated in July, with labor shortages and rising demand due to aging demographics colliding with immigration changes. The increase in childcare costs outpaced the usual jump we see with the surge in demand for daycare over the summer. 

Brace for more upward pressure on those prices and rationing as an estimated 200,000 Haitian workers lost their Temporary Protected Status work visas at the end of July. Employers were compelled to let those workers go. The most affected sectors were food services and elder care. Nursing homes were hit hard.

That is occurring at the same time that cuts to Medicaid at the state level are shifting the costs of care to households. That is adding to the ranks of those providing unpaid eldercare for family members at home. Men and women more evenly share the burden of eldercare than childcare. Employers often do not realize how many workers are juggling care for an elder family member. 

Discretionary services prices were more benign. Some of that reflects a pullback by low- and middle-income consumers amidst elevated prices at the gas pump. Another portion reflects a drop in airfares abroad as jet fuel fees eased in July. 

The persistence of core and services inflation is at the heart of the debate within the Fed’s leadership. Hawks worry that underlying inflation is too high and that a rate hike is overdue. Others are willing to wait for more evidence, although the data are already moving in that direction. Doves are holding out hope that inflation will cool once recent shocks fade.

Those who want to hold interest rates steady face a potentially hotter August inflation reading, with some spillover into September. The Bureau of Economic Analysis will update the PCE methodology in September, which could shave 0.1 to 0.2 percentage point from annual rates. That would not be enough to change the inflation narrative.

The trade war with Canada adds another wrinkle: If Canada’s retaliatory tariffs go into effect as scheduled on September 8, then some items will suffer double taxation. That raises costs and could cause some firms to idle production. 

The tariffs threatened by the administration for January 1, 2027, are more consequential. They hit at the core of the vehicle sector. The integration of the industry between the two countries started in the 1960s. 

Consumers treaded water 

Consumer spending was flat in July after adjusting for inflation, a marked downshift from the 0.3% gain in June. Spending on big-ticket items that often require financing fell, while spending on services increased. Outlays for Medicare surged during the month. 

Given the strong level of spending in June, only a modest acceleration is needed to produce solid – if not spectacular – third quarter gains. The most immediate threat is the trade war with Canada.

If Canada’s retaliation takes effect on September 8, many goods crossing the border could be taxed twice. That would raise costs and could trigger layoffs, weighing on spending later in the third quarter and into the election.

Disposable personal incomes surprised to the upside and jumped 0.4% after adjusting for inflation. Wages and salaries got an extra boost from tax cuts at the state level with the start of a new fiscal year for many states. Medicare outlays also jumped due to aging demographics. Farm income remained subdued.

The saving rate jumped to 3% in July from a downwardly revised 2.6% in June. That is its highest rate since March and should help to buoy spending in August. 

The divide in consumer spending remains acute. Higher-income households can still travel, dine out and spend on services. Lower- and middle-income households are absorbing higher costs for food, insurance, healthcare and debt service. Inflation is a regressive tax: It compounds over time and hits hardest those least able to absorb it.

The inequality and regressive nature of inflation showed up clearly in the August consumer attitude surveys. The University of Michigan’s preliminary consumer sentiment index plunged 7.6% to 51.0 from 55.2 in July, ending two months of improvement. Expectations deteriorated more sharply than assessments of current conditions, while year-ahead inflation expectations edged up to 4.3%. 

Only 8% of consumers expected their incomes to outpace inflation over the next year, down from 18% in December 2024. The largest declines occurred among older consumers, lower income households and those without a college degree. Those are the groups most vulnerable to an erosion in purchasing power.

The Conference Board’s measure told a similar story. Consumer confidence fell for a second consecutive month to 89.4, its weakest reading since January, as anxiety about the outlook deepened.

Sentiment surveys have been poor predictors of overall spending because an increasing share of consumption is concentrated among fewer, wealthier households. The economy may still add up on paper, but it feels much weaker to most Americans.