US inflation holds at 3.7 percent in July, above Fed target

Inflation in the United States remained stuck well above the Federal Reserve's 2 percent target in July, adding to uncertainty over whether the central bank will keep interest rates unchanged or consider raising them.

The Personal Consumption Expenditures (PCE) Price Index rose 3.7 percent in the 12 months to July, matching June's reading, according to data released on Wednesday by the Bureau of Economic Analysis at the US Department of Commerce.

On a monthly basis, prices increased 0.2 percent in July after falling 0.1 percent in June. Economists had expected a smaller 0.1 percent rise.

Core PCE inflation, which excludes volatile food and energy prices and is closely watched by Federal Reserve officials as a measure of underlying inflation, also remained elevated. It increased 3.3 percent over the year and rose 0.2 percent in July, up from 0.1 percent in June.

The latest figures strengthened expectations that the Federal Reserve could consider raising interest rates at its September 15-16 meeting. Futures markets were pricing in about a 42 percent chance of a rate increase following the data, up from roughly 36 percent beforehand.

Inflation has accelerated since the US and Israel launched attacks on Iran in late February. Annual PCE inflation was then 2.9 percent before climbing to 4.1 percent in May, its highest level in three years, as the conflict disrupted global oil supplies and sent energy prices sharply higher.

While fighting has since eased and oil prices have retreated from their spring highs, the conflict remains unresolved six months later. The earlier surge in energy costs has nevertheless contributed to broader inflationary pressures across the US economy.

American consumers continue to express concern about the state of the economy and their personal finances. One factor is the erosion of household purchasing power caused by persistent inflation.

The latest figures showed inflation-adjusted incomes were only 0.2 percent higher than a year earlier, following several months of declines.

Fuel costs could add further pressure to inflation in August. Average petrol prices in the US have risen again this month, reaching about $4.10 per gallon, according to the American Automobile Association.

New tariffs could also contribute to higher prices in the months ahead. Trade relations between the US and Canada, America's second-largest trading partner, deteriorated after negotiations broke down on Friday.

The dispute resulted in new tariffs covering about $20 billion of Canadian goods. Washington and Ottawa have since announced additional retaliatory measures that are due to take effect in coming months unless the two sides reach an agreement.

The combination of persistent inflation, higher fuel costs and potential tariff-related price increases is likely to keep pressure on the Federal Reserve as policymakers weigh their next interest-rate decision.