An inflation measure closely watched by the Federal Reserve stayed elevated last month in the latest sign that many Americans are still struggling with higher costs, while stubbornly high prices are shaping up to be a key issue in the midterm elections.
Those midterms are now just 10 weeks away, particularly as the Iran war and the war between Ukraine and Russia keeps gas prices high.
Gas Buddy's Patrick De Haan tells ABC News that if trends continue, it could be the highest gas costs have ever been on Labor Day.
"Even if the national average does see slight relief, we'd still have to drop significantly down to $3.83 a gallon to avoid setting a new Labor Day record," says De Haan.
The average gallon of regular in Minnesota dropped two cents overnight, to $4.10, on par with the national average.
De Haan adds that diesel prices are also staying high, and that could drive prices on other goods even higher.
"Diesel prices today continuing to climb at nearly $5.60 a gallon at the worst potential time," De Haan explains. "Farmers getting close to harvesting their crops, and that could push the needle higher for inflation in the months ahead as diesel now is only 25 cents a gallon away from reaching a new all-time record."
President Donald Trump is also threatening new tariffs on Canada and China, and spending on AI infrastructure has pushed up the cost of computers, gaming consoles, and semiconductors.
Inflation remained high in July even as gas prices fell, partly because the cost of services, including health care, utilities, and financial services, jumped. Yet the government plans to change the way it calculates the cost of some services starting with next month's figures, which could lower measured inflation.
Inflation remains elevated and above the Federal Reserve's target
The Commerce Department’s Wednesday report showed that prices rose 3.7% in July compared with a year earlier, the same as June. Inflation has worsened since the U.S. and Israel attacked Iran in late February, when it stood at 2.9%. It’s noticeably above the Fed’s target of 2%.
Wednesday's figures are from the personal consumption expenditures price index, a separate gauge from the more widely followed consumer price index, which was reported earlier this month. The PCE index is running hotter than the CPI, partly because it puts much less weight on rental costs, which have been cooling steadily in recent months.
Excluding the volatile food and energy categories, core inflation was also unchanged at 3.3% in July. It had fallen to 2.6% before President Donald Trump imposed sweeping tariffs in April 2025.
On a monthly basis, overall prices rose 0.2% from June to July, after declining 0.1% the previous month and jumping 0.5% in May. Core prices also moved up 0.2% from June to July, up from 0.1% in the previous month. Some Fed officials have said that core inflation running at about 0.2% a month would be a reassuring sign that inflation is heading back to the 2% target.
The inflation gauge will be revised lower next month
Many economists have noted that the PCE index has been pushed higher by the way it calculates the cost of financial advice, as well as how it measures prices for software and computer accessories. When stock markets rise, that translates into bigger gains in what the government calls “portfolio management services.” Yet that measure doesn't always fully capture what Americans actually pay for financial services.
At the same time, the PCE also likely captures some business-related spending on software, even though it should only focus on consumer spending, analysts say.
As a result, the Commerce Department has said it plans to adjust those measurements, among others, starting next month. Economists, who largely agree with the changes, forecast that they will reduce annual PCE inflation by 0.2 percentage point or so.
Inflation measure stayed elevated while gas prices remain stubbornly high
Inflation measure stayed elevated while gas prices remain stubbornly high
