Sticky U.S. Inflation Keeps Fed Rate Debate Alive as Spending Slows

US inflation remained elevated in July even as consumer spending lost momentum, leaving the Federal Reserve facing competing signals ahead of its September policy meeting.

The Federal Reserve faces a policy dilemma as inflation remains above its 2% target while consumer demand shows signs of slowing.

The personal consumption expenditures price index rose 0.2% in July and 3.7% from a year earlier. Core PCE inflation, which excludes food and energy, also increased 0.2% during the month and 3.3% year over year.

Both measures remained above the Fed's 2% inflation target.

At the same time, real consumer spending was essentially unchanged in July after rising 0.4% in June. Disposable personal income increased 0.5%, while the personal saving rate climbed to 3.0% from 2.6% in June.

The combination leaves policymakers balancing persistent inflation against signs that households may be becoming more cautious.

The Fed has said inflation remains elevated relative to its 2% goal and has maintained its federal funds target range at 3.50% to 3.75%.

Three members dissented from the July decision, preferring a quarter-point rate increase.

The next major test will come with incoming labor-market and inflation data before the Fed's Sept. 15-16 meeting. For now, the July figures offer neither a clear case for easing policy nor a definitive signal that additional tightening is necessary.