July PCE inflation index held at 3.7% annual pace, hotter than expected

The Personal Consumption Expenditures index \u2014 the Federal Reserve\u0027s preferred inflation measure \u2014 held at a 3.7% annual pace in July, slightly higher than forecasted and reflecting persistent cost pressures for consumers.Economists polled by FactSet had predicted a 3.6% annual increase. Wednesday\u0027s report instead showed that inflation remained unchanged from June.PCE tracks changes in the prices of goods and services bought by U.S. households. The measure is closely tracked by the Federal Reserve, which uses it to inform its interest rate decisions.PCE has eased after reaching a\u00a0three-year peak in May, but remains well above the Fed\u0027s 2% target. The Iran war has pushed up oil and gas prices, eating into consumers\u0027 budgets and putting pressure on household spending."The United States still has an inflation problem. PCE inflation came in hotter than expected," said Heather Long, chief economist at the Navy Federal Credit Union, in an email. "The impacts of the war in Iran are still apparent with $4 gas and $5.60 diesel."Core PCE, which excludes more volatile energy and food prices, rose at an annual rate of 3.3%, slightly higher than the 3.2% pace predicted by economists and also unchanged from June.\u00a0Consumer spending is showing signs of fatigue from higher prices, with the latest data showing that spending on goods declined by $49.9 billion. However, consumer spending on services increased by $86.2 billion.\u00a0Separate data released on Wednesday showed the U.S. economy expanded at a 1.5% clip in the second quarter, a sluggish reading in line with the Commerce Department\u0027s first estimate.What does this mean for the Fed?The latest PCE data shows inflation remains stubborn, a challenge for the Federal Reserve as it attempts to rein in prices. Fed officials have held interest rates steady so far this year, although some have signaled they\u0027re open to raising rates to tame inflation.Fed Chair Kevin Warsh is scheduled to deliver an address in Jackson Hole, Wyoming, on Friday, where investors will look for clues about the central bank\u0027s next steps."The challenge is becoming increasingly clear: inflation is still too high for comfort, and investors will be watching to see whether Fed Chair Kevin Warsh uses Friday\u0027s Jackson Hole speech to address how policymakers plan to bring it back toward the Fed\u0027s long-term target," wrote eToro\u202fU.S. investment analyst Bret Kenwell in an email.