Research
August 26, 2026
PCE Deflator
PCE inflation remained higher than desired in July, while restaurant spending continued to be resilient
The Personal Consumption Expenditures (PCE) deflator, the Federal Reserve's preferred measure of inflation, rose 0.2% in July after declining 0.1% in June. Lower gasoline and energy prices for the second consecutive month helped moderate overall inflation, although energy costs remained 25.1% higher than a year earlier.
Prices for food and beverages purchased for off-premises consumption edged down 0.1% in July following increases in the previous three months. Even with that decline, prices for food and beverages purchased for off-premises consumption were 2.4% higher than a year ago.
On a 12-month basis, the headline PCE deflator increased 3.7% in July, matching June's pace but easing from 4.1% in May, which marked the fastest inflation rate since April 2023. Core PCE inflation, which excludes food and energy, rose 0.2% in July after increasing 0.1% in June. Over the past year, core inflation held steady at 3.3% in July and has averaged that pace for five consecutive months (March through July), up from an average of 2.9% during the prior five-month period (September through February).
Taken together, the data suggest that lower energy costs helped ease pricing pressures in June and July. However, renewed hostilities in Iran have pushed energy prices higher again, and the broader inflation trend has drifted upward over the past year.
This presents a challenge for the Federal Reserve as inflation remains well above its long-run 2% target. Recent communications from policymakers have adopted a more hawkish tone, reflecting rising concern that progress on inflation has stalled. While interest rates are expected to remain unchanged in the near term, speculation is growing that additional rate hikes could be warranted later this year if inflation continues to exceed levels considered consistent with the Federal Open Market Committee's objectives.
Consumer spending continued to expand in July, with personal consumption expenditures rising 0.2%. While that was the slowest monthly increase since January, it still reflects a healthy pace of spending following strong gains throughout the spring. In nominal terms, consumer demand has remained resilient despite elevated gasoline prices, weaker consumer confidence, and broader economic uncertainty, with higher tax refunds likely providing additional support earlier in the year. Spending on foodservices and accommodations rose 0.3% in July, matching June's pace and extending a six-month streak of gains.
Over the past 12 months, total personal consumption expenditures increased 5.9%, underscoring the continued strength of consumer spending. Spending on foodservices and accommodations rose 4.4% over that period, suggesting that consumers have largely maintained their willingness to dine out and travel.
Even so, a significant share of spending growth reflects higher prices rather than stronger purchasing activity. After adjusting for inflation, real personal consumption was up 2.1% from a year earlier but was unchanged in July. Real spending on foodservices and accommodations increased 1.0% over the past year, pointing to continued, albeit more moderate, growth in discretionary spending.
Personal income rose 0.4% in July, up from 0.2% in June. Overall, personal income grew by 3.7% over the past 12 months. Wages, which have been a large contributor to the economy’s resilience, increased 0.3% in July, with 3.5% growth year-over-year.
With income outpacing spending growth, the personal savings rate increased from 2.6% in June, the lowest in four years, to 3.0% in July. Overall, the savings rates in the post‑pandemic period remain well below historical norms. Prior to the pandemic, the savings rate averaged 6.5% from 2017 to 2019, compared with an average of just 3.3% year to date. This suggests that consumers are dipping into their savings to finance their spending.
Prices for food and beverages purchased for off-premises consumption edged down 0.1% in July following increases in the previous three months. Even with that decline, prices for food and beverages purchased for off-premises consumption were 2.4% higher than a year ago.
On a 12-month basis, the headline PCE deflator increased 3.7% in July, matching June's pace but easing from 4.1% in May, which marked the fastest inflation rate since April 2023. Core PCE inflation, which excludes food and energy, rose 0.2% in July after increasing 0.1% in June. Over the past year, core inflation held steady at 3.3% in July and has averaged that pace for five consecutive months (March through July), up from an average of 2.9% during the prior five-month period (September through February).
Taken together, the data suggest that lower energy costs helped ease pricing pressures in June and July. However, renewed hostilities in Iran have pushed energy prices higher again, and the broader inflation trend has drifted upward over the past year.
This presents a challenge for the Federal Reserve as inflation remains well above its long-run 2% target. Recent communications from policymakers have adopted a more hawkish tone, reflecting rising concern that progress on inflation has stalled. While interest rates are expected to remain unchanged in the near term, speculation is growing that additional rate hikes could be warranted later this year if inflation continues to exceed levels considered consistent with the Federal Open Market Committee's objectives.
Consumer spending continued to expand in July, with personal consumption expenditures rising 0.2%. While that was the slowest monthly increase since January, it still reflects a healthy pace of spending following strong gains throughout the spring. In nominal terms, consumer demand has remained resilient despite elevated gasoline prices, weaker consumer confidence, and broader economic uncertainty, with higher tax refunds likely providing additional support earlier in the year. Spending on foodservices and accommodations rose 0.3% in July, matching June's pace and extending a six-month streak of gains.
Over the past 12 months, total personal consumption expenditures increased 5.9%, underscoring the continued strength of consumer spending. Spending on foodservices and accommodations rose 4.4% over that period, suggesting that consumers have largely maintained their willingness to dine out and travel.
Even so, a significant share of spending growth reflects higher prices rather than stronger purchasing activity. After adjusting for inflation, real personal consumption was up 2.1% from a year earlier but was unchanged in July. Real spending on foodservices and accommodations increased 1.0% over the past year, pointing to continued, albeit more moderate, growth in discretionary spending.
With income outpacing spending growth, the personal savings rate increased from 2.6% in June, the lowest in four years, to 3.0% in July. Overall, the savings rates in the post‑pandemic period remain well below historical norms. Prior to the pandemic, the savings rate averaged 6.5% from 2017 to 2019, compared with an average of just 3.3% year to date. This suggests that consumers are dipping into their savings to finance their spending.