Fed July Monetary Policy Report said inflation picked up further in the spring, marking a firmer shift in the central bank’s language on price pressures.
The report said consumer price measures started rising last year and then increased more in the spring. It showed headline PCE inflation at 4.1% in May, up from 2.5% a year earlier. Core inflation also rose to 3.4% from 2.8%.
The Fed linked the increase to tariffs, an energy shock after conflict broke out in the Middle East, and strong demand for high-tech equipment tied to artificial intelligence. Energy prices climbed 24% from a year earlier. Meanwhile, core goods inflation accelerated to 2.4% from 0.6%.
Fed July Monetary Policy Report on Prices
The report also said prices for computers, software and electronics rose as demand increased for semiconductors and data-centre infrastructure. However, some parts of the inflation data improved. Housing-services inflation slowed to 3.2% from 4.1%, while the Dallas Fed’s trimmed-mean PCE measure eased to 2.4%.
Longer-term inflation expectations stayed broadly anchored, the report said. Shorter-term expectations, however, moved higher. In addition, core non-housing services inflation remained firm at 3.9%.
That language helps explain the Fed’s move away from an easing bias. The median projection now shows the fed funds rate at 3.8% at the end of 2026, up from 3.4% in March. That points to a possible 25-basis-point increase from the current 3.50% to 3.75% range.
Growth Stays Solid but Uneven
The report said economic activity continued to expand at a solid pace, though several details were softer. GDP grew at a 2.1% annualized rate in the first quarter. Private domestic final purchases rose 1.7%, while gross domestic income increased 1.2%.
Consumer spending slowed to a 1.3% annualized pace through the first five months of the year. By contrast, business fixed investment jumped at an 11% annualized rate in the first quarter after rising 5.5% in 2025. Data-centre construction, high-tech equipment and software drove much of that gain.
The labor market remained stable. The unemployment rate stood at 4.2% in June, and private payroll growth improved to nearly 100,000 per month in the second quarter. The Fed also lowered its 2026 growth forecast to 2.2% from 2.4%, while raising its headline inflation forecast to 3.6% from 2.7% and its core forecast to 3.3% from 2.7%.
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