Inflation Refuses to Go Back into the Bottle: Fed

AI has begun exacting its pound of flesh directly from consumers. And “Core Services” inflation remains hot. By Wolf Richter for WOLF STREET. The Fed-favored PCE price index today shed a slightly different and more ominous light on inflation for July than the CPI had done earlier this month. Energy prices were still up 15% from a year ago, and food inflation accelerated slightly to 2.4%. But beyond energy and food, the “core” PCE price index suffered from inflation in core services, where over 60% of consumer spending goes, and from the AI boom that has begun to exact its pound of flesh from consumers. The core PCE price index – which excludes energy and food – rose by 0.25% in July from June (3.0% annualized, blue in the chart below). Year-over-year, it rose by 3.35%, same increase as in June. The last four months produced the worst increases since October 2023 (red in the chart). The Fed uses the core PCE price index as one of the yardsticks for its 2% inflation target (dotted purple line); it allows the Fed to “look through” an energy price spike and the subsequent energy price plunge. The core PCE price index has been above the Fed’s 2% target since March 2021, and never got even close to the Fed’s 2% target. It bottomed out at 2.6% in April 2025 and has been moving away further from the 2% target ever since. The all-items PCE price index – the other inflation index used by the Fed as its inflation yardstick – rose by 0.16% in July from June (+1.9% annualized, blue line in the chart below). Year-over-year, the PCE price index rose by 3.7%, same increase as in June. Inflation in the five months of March through July was the worst since March 2023 (red line). By this measure, inflation is nearly double the Fed’s inflation target of 2% (dotted purple line) and has been moving away from the target since May 2025. The “core services” PCE price index rose by 0.27% in July from June (+3.3% annualized, blue in the chart below). Year-over-year, the core services PCE price index rose by 3.7%. May, June, and July – all in this range – showed the worst increases since February 2025. Core services account for over 60% of consumer spending. They include rent, healthcare, travel, lodging, transportation services (such as airline fares), insurance of all kinds, auto repair and maintenance, subscriptions of all kinds, financial services, etc. It’s where inflation is tough to battle because a lot of core services either lack adequate competition that consumers can leverage, or are difficult or impossible to shop around, such as healthcare. Companies that are confident they can raise their prices without losing customers, raise their prices, and consumers wail and gnash their teeth but pay them. The durable goods PCE price index jumped by 0.37% in July from June (+4.6% annualized) and by 3.4% year-over-year. A number of goods categories saw falling prices year-over-year, with some categories coming off the price spikes last year, and many had modest price increases. But two categories experienced sharp price increases recently: - Information processing equipment (computers, tablets, accessories, software) spiked by 1.4% month-to-month (+18% annualized) and by 15.5% year-over-year. It started suddenly in December. Over the past eight months, the PCE index for this category has spiked by 22%. This is where AI is exacting its pound of flesh directly from consumers. - Jewelry and watches spiked by 2.0% month-to-month (+27% annualized) and by 14.8% year-over-year, as the years-long spike in gold prices is gradually getting passed on to consumers. Food prices edged down in July, after the jump in June. Year-over-year, the index rose by 2.40%, the highest in three months. Many food categories experienced price increases, and many experienced price declines. Egg prices fell further, continuing to unwind the avian-flu profiteering spike. Beef prices seem to have topped out and have begun to edge down. Coffee is still climbing up the spike. Sugar and sweets continue to head higher, as is fresh milk, and fresh seafood. Poultry and pork declined month to month and were roughly unchanged from a year ago. The energy PCE price index fell by 1.5% in July from June, the second month in a row of declines, after the spike in the prior months. Year-over-year, the index was still up by 15.3%. Within it, the gasoline index was still up by 25% from a year ago. This chart shows the price level, not the year-over-year percentage change. Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how: Thanks WR for this. I wonder if FED takes a note of this, and hike rates or treat it being transitory! I agree with FED as nothing in permanent in life /s They are going to “look through it” to avoid raising rates. They will do anything but what they should do. I’ll say it again, it’s the summer of 73 again, the second wave of inflation is just getting started… …this time with 40 trillion in debt to service. Go ahead Mr. Warsh, raise those rates and reduce that balance sheet! I triple dog dare you! LOL! Paul Volcker eventually killed inflation with a 21.5% prime rate. What was their excuse back in ’73? Was the relationship between interest rates and inflation understood differently than today, or something else? As a school kid in the 80s, I remember being taught that this “stagflation” was due to the oil shocks, but I imagine that was over simplified. Having lived through the 70s inflation and Arthur Burns catering to Nixon, the situation today is even Worse because of the partisan control of congress and a Fed that cannot put on a pair of Volcker big boy pants. Are those inflation times and these inflation times comparable? I dunno. We’re def getting crushed now. The extra amount that I do not put into savings is quite large. The amount that goes to higher prices and a lot of times these higher prices have zero reason to be high except greed. Also the mental gymnastics one has to do these days just to squeeze out a few thousand dollars savings over the year… they are draining. Health insurance here in NC is about to increase 17.9% too for 2027. Greed greed everywhere. So – question- why is the 2% target a target at all? Feeling 3% is the new 2% best. Arbitrary numbers are well just that. Prices up staying up spending remains solid debt seems controlled??? Well whatever the inflation target is, bonds need to be priced above it to provide a return to investors. Setting it to 3% would have repercussions throughout the bond market. If it’s 3%, fine, but then they should be honest and say so, shouldn’t they? Or if there’s no target, or a floating target, or a secret target, or a target of “reasonable and prudent”*, just tell the public that there will be no fixed numeric target. How does that sound? * “Reasonable and prudent” was literally the daytime highway speed limit in Montana for a brief period in the 1990s, and in an earlier era before the 70s era national speed limit. In its second iteration, it didn’t last. Too many drivers couldn’t handle the lack of a numeric limit. There shouldn’t be any inflation at all. It shouldn’t Exist. It’s a tax on people because they created a flawed monetary system. The money supply should ALWAYS be fixed. “inflation for July than the CPI had done earlier this month. Energy prices were still up 15% from a year ago” Anecdotal: where I live, Gasoline was around 4.19 in July. Today August 26 it’s 4.59 – diesel is worse. Gas has inceased by 10 cents every 2 weeks or so. Of course, it’s near peak summer driving season, so maybe it goes down a bit as usual in October. I wonder if Druckenmiller was short treasury futures and had to cover. I doubt it, but it seems he was testing how well AI works for writing articles that get published in the WSJ. Probably Still waiting for someone out there to care. GDPNow St. Louis Fed shows 4.6 percent. Same as Atlanta Fed GDPnow. The demand deposit vs. time deposit ratio has risen back to early 60’s levels. It is still rising. That is propelling the economy. It is the reason why there hasn’t been a recession. GDPNow is all over the place, especially this early in the quarter with hardly any Q3 data… It’s just now getting July data. So I don’t put a lot of weight into it. With Core services the largest driver behind overall rate of inflation, does the Fed have any knobs to tweak this area? Core services do not seem particular sensitive to interest rates. It seems that until core services inflation is controlled more by consumers rather than the Fed. Until the consumers say “enough” or economic conditions dictate cutbacks in these areas, I don’t see how the Fed can do much to influence it. The FED has lots of knobs and tools and buffoons and….. Yeah his name rhymes with Porsche The only ttue medicine to stop this growth is a serious bout of deflation. Because of Bernankes QE and ZIRP, Corporations gobbled up competition with cheaper than dirt money and the government went crazy with deficit spending. Corporations were in control of prices from Covid on. Then along come tariffs, wars and the rest. This country is in deep economic caw caw because of partisan leadership run by lobbyists and think tanks. Thanks WR. The key phrase in this article pertains to services: “It’s where inflation is tough to battle because a lot of core services either lack adequate competition that consumers can leverage, or are difficult or impossible to shop around…” These things won’t be fixed by higher interest rates. They’re the result of years and years of negligence with respect to enforcing antitrust laws, and a corrupt healthcare industry that’s captured Congress. “Inflation Refuses to Go Back into the Bottle“ What if the genie that has already come out of the bottle ends up being a Pandora’s box type situation? (After Pandora opened the jar (mistranslated over time as a box), all the evils, miseries, and illnesses of the world escaped to plague humanity, while only hope remained trapped inside.) And on the global energy front, the Russian Federation has now become an energy importer and there is a severe energy crisis throughout, including in Moscow. Farmers across Russia have given up hope since there is no deisel to harvest grain for the foreseeable future. Russian grain exports to the wider world are shut down….export terminals are closed. The Straight of Hormuz continues to be a serious choke point for the global economy. What a cluster…inflation in the US, in my opinion, is totally out of control. I can explan what the Fed is doing! Now that the Fed can “look through” or call inflation “transitory”, that adds a secret 1% to the 2% target rate. We’re at around 3% inflation, so no change but you’ll get some hawkish language so they can avoid raising rates. Wolf, you mentioned in a previous post comment that one solution to the national debt is to reduce the rate of debt growth, then let GDP run hot to slowly reduce the debt-to-GDP ratio. Assuming the rate of debt growth slows, is the level of inflation reported in this post what would be compatible with letting GDP “run hot”? If part of the plan to address the debt is to let GDP run how, should we expect this level of inflation to be a part of that plan? Here’s the comment I’m referring to: “No one needs to stop the deficits. They just need to bring the deficit’s rate of increase down and let nominal GDP run hot to where nominal GDP (+6.5% yoy in Q2) outgrows by a significant margin the growth of the overall debt, so that the debt-to-GDP ratio comes down over time. “ The debt and deficit are in nominal dollars (not inflation adjusted), so GDP growth (also nominal) needs to be bigger than the debt growth. Nominal (“current dollar”) GDP grew by 6.6% year-over-year in Q2; after growing by 6.1% and 5.4% year-over-year in the prior two quarters. But the debt grew faster than that, so that’s the problem. If they can slow the growth of the debt by 2 percentage points (from around 5-8% year-over-year now) and increase nominal GDP growth by 2 percentage points, for years, that would make significant headway in bringing down the debt to GDP ratio. I’m going to post my quarterly article on the US fiscal situation over the next few days, with all kinds of good data. So keep your eyes out for it.