2.9% rise highest since Feb

Inflation edged higher in July, according to the Federal Reserve’s preferred inflation measure, indicating that President Donald Trump’s tariffs are working their way through the U.S. economy.

The personal consumption expenditures price index showed that core inflation, which excludes food and energy costs, ran at a 2.9% seasonally adjusted annual rate, according to a Commerce Department report Friday. That was up 0.1 percentage point from the June level and the highest annual rate since February, though in line with the Dow Jones consensus forecast.

On a monthly basis, the core PCE index increased 0.3%, also in line with expectations. The all-items index showed the annual rate at 2.6% and the monthly gain at 0.2%, also hitting the consensus outlook.

The Fed uses the PCE price index as its primary forecasting tool. Though it watches both numbers, policymakers consider core inflation to be a better indicator of longer-term trends as it excludes the volatile gas and groceries figures.

Central bankers target inflation at 2%, so Friday’s report shows the economy still a distance from where the Fed feels comfortable.

Nevertheless, markets expect the Fed to resume lowering its benchmark interest rate when policymakers convene next month. Fed Governor Christopher Waller reiterated his support for a cut in a speech Thursday, saying he would entertain a larger move if labor market data continue weakening.

“The Fed opened the door to rate cuts, but the size of that opening is going to depend on whether labor-market weakness continues to look like a bigger risk than rising inflation,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “Today’s in-line PCE Price Index will keep the focus on the jobs market. For now, the odds still favor a September cut.”

Trump in April imposed a baseline 10% tariff on all imports and since has leveled so-called reciprocal tariffs on multiple trading partners and slapped duties in individual goods as well. In addition, the White House has scrapped exceptions for goods under $800.

Along with the inflation moves, consumer spending increased 0.5% on the month, in line with forecasts and indicative of strength despite the higher prices. Personal income accelerated 0.4%, rounding out a report that saw all figures hit the consensus outlook.

Stock market futures remained negative after the release while Treasury yields held gains.

Inflation numbers were held in check by a 2.7% annual decline in prices for energy goods and services. Food prices rose 1.9% from a year ago. The balance also tilted heavily toward services prices, which jumped 3.6%, compared with just a 0.5% increase in goods.

On a monthly basis, energy was off 1.1% and food was down 0.1%. Services prices rose 0.3%, essentially accounting for all the monthly increase as goods decreased 0.1%.