WRAPUP 2-US inflation remains sticky in July; second-quarter GDP growth unrevised at 1.5%

Annual ‌U.S. ​inflation unexpectedly held steady in July well above the Federal Reserve's 2% target for the 65th straight month, and the pause in the decline from a recent war-induced peak is likely to intensify the central bank's debate over whether interest rates should be lifted or held steady.

The Personal Consumption Expenditures Price Index increased 3.7% ‌in the 12 months through July, unchanged from June, the Commerce Department's Bureau of Economic Analysis said on Wednesday. Economists polled by Reuters had forecast a reading for PCE, which the Fed uses to set its target, of 3.6%. The month-over-month figure also came in higher than expected at 0.2% in July after falling 0.1% in June, which had been the weakest reading since April 2020. Economists had forecast a 0.1% increase. Excluding energy and food prices, ‌so-called core PCE — which Fed officials use as a guidepost for inflation's underlying run rate — held steady at 3.3% on the year while rising to 0.2% on the month from 0.1% in June. The above-forecast headline ‌print gave a modest lift to expectations that the Fed may raise interest rates as soon as next month. Fed funds futures prices reflected about a 42% probability of a rate hike at the central bank's September 15-16 meeting after the report, versus about 36% immediately before. "This is data that supports a hike," said Omair Sharif, founder and president of forecasting firm Inflation Insights. "The unrounded core PCE was 0.246%, so it barely missed out on rounding to 0.3%. That is a one-month annualized rate (of) nearly 3.0%." WAR AND TARIFFS CLOUD ⁠INFLATION OUTLOOK

Annual PCE ​shot to a three-year high of 4.1% in ⁠May in rapid fashion after President Donald Trump launched air strikes along with Israel against Iran in late February, sending energy prices spiraling upward as the conflict shut in roughly a fifth of global oil supplies. Six months later the conflict appears no closer to a ⁠final resolution, though the exchange of fire has diminished and oil prices and the wider inflation wave they instigated have retreated from their mid-spring highs. The slowdown in inflation in the last two months has helped buoy the arguments of the majority ​of Fed policy committee members who voted last month to leave the central bank's benchmark interest rate unchanged in the 3.50%-3.75% range, where it has been since December. But the sluggish pace of ⁠improvement is unlikely to mollify a growing minority of Fed officials who argue tighter policy is needed, given that inflation has been above target since February 2021 and will not get to the 2% level without further restraint. Inflation as measured by PCE peaked at 7.2% in ⁠June ​2022, and the steepest Fed rate increases since the 1980s helped put it on a path back toward 2%. That trajectory changed last year after Trump unleashed a wave of import tariffs upon his return to the White House, sending a wide range of goods prices higher, with the Iran war exacerbating those pressures. And new tariff-induced pressures are likely coming, after trade negotiations between the U.S. and its second-largest trading partner, Canada, ⁠fell apart on Friday, resulting in new levies on $20 billion of Canadian imports to go into effect. Since then, Washington and Ottawa have each announced additional retaliatory measures to go into effect in coming months ⁠unless a deal is reached to avert them. The BEA on ⁠Wednesday also updated data for economic growth for the second quarter, leaving unchanged its estimate of annualized gross domestic product growth at 1.5%. Among the notable changes from the first estimate was an upward revision to consumer spending during the April-through-June period to 3.4% from the originally reported 3.2%, an indication that the individual consumption ‌that supports two-thirds of U.S. economic activity ‌had held up through the first half of the year.