Inflation Is Proving a Stubborn Foe Despite Lower Energy Costs

August 29, 2025 3

A decline in the price of energy was not enough to offset rising prices for services such as insurance.

A key inflation metric released on Friday showed that rising prices remained a problem in July.

The personal consumption price expenditures index rose at an annual pace of 2.6%, the same rate as in June but above the Federal Reserve’s 2% annual goal. The index that excludes often volatile food and energy costs increased at an annual rate of 2.9%, up from 2.8% a month earlier.

While the numbers were in line with expectations, they do show inflation remains a stubborn problem for the Fed and consumers alike.

For the month, energy prices fell by 1.1% while food declined by 0.1%. However, while energy costs have fallen 2.7% from a year ago, the cost of food has risen by 1.9%.

Much of the increase in inflation came from rising costs for services such as insurance, rather than goods such as furniture. On the plus side, personal income and spending were strong in July.

While noting the squeeze on middle income consumers, Navy Federal Credit Union Chief Economist Heather Long said: “The most encouraging news in today’s report is monthly spending and income rebounded. In fact, monthly spending was higher than income for the first time since March. This is an encouraging sign that American consumers are still willing to open their wallets when they see deals.”

“There was a large rebound in spending on cars and motor vehicle parts. Navy Federal Credit Union continues to see strong demand for used vehicles,” Long added.

The Fed is expected to begin lowering interest rates next month with the move coming as the central bank grapples with a weakening labor market and inflation.

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The Fed is under pressure from President Donald Trump, who has been highly critical of Chairman Jerome Powell’s resistance to lowering interest rates. Trump also says he is firing Lisa Cook, a member of the Fed’s board of governors, over unproven allegations she engaged in mortgage fraud. Cook has sued Trump and a hearing is scheduled for Friday.

But yields on long-term government bonds have risen in recent days as the Fed’s historic independence has been called into question.

“The odds strongly favor a September Fed rate, likely 25 basis points, and the discussion may shift to whether a 50-basis-point cut could follow in October,” James Ragan, Director of Wealth Management Research at D.A. Davidson & Co., wrote ahead of the PCE report’s release.

“The resumption of a Fed-driven interest rate reduction cycle could add more stimulus to the mix, adding to the pro-growth outlook, but challenges remain including slowing monthly jobs gains, consumer spending trends that are below 2024 levels, and tariff policies that can restrict growth and add to inflation,” Ragan added.

On Thursday, the government revised upward its estimate of second quarter gross domestic product to an annual rate of 3.3% from 3%. But a lot of that was because of a reversal of imports that occurred in the first quarter. Economists are generally predicting a slowdown in economic growth as the effects of Trump’s import tariffs prove a drag on the economy.

That slower growth forecast and the ebbing of job gains are behind the recent signal from the Fed that rates may be headed lower. Speaking a week ago at the central bank’s summer retreat at Jackson Hole, Wyoming, Powell said the central bank was watching to see whether tariffs would be a one-time hit to inflation or something more persistent.

“Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” Powell said.

That was widely interpreted to mean a cut of a quarter point in the Fed’s key lending rate would be made when the central bank meets next month.

Source: https://money.usnews.com/money/personal-finance/articles/inflation-is-proving-a-stubborn-foe-despite-lower-energy-costs

Written by: Joshua Stuart

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