Key inflation gauge remains elevated during Iran conflict and ongoing US trade fights

WASHINGTON (AP) — An inflation measure closely watched by the Federal Reserve was unchanged last month in the latest sign that many Americans are still struggling with higher costs. 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%. Stubbornly high prices are shaping up to be a key issue in the midterm elections, now just 10 weeks away, particularly as the Iran war keeps gas prices high, President Donald Trump is threatening new tariffs on Canada and China, and spending on AI infrastructure has pushed up the cost of computers, gaming consoles, and semiconductors.

The new inflation data is unlikely to fully resolve a split at the Federal Reserve, where most officials are willing to hold interest rates steady to see if inflation can cool on its own. But many Fed officials have supported raising rates in a bid to slow borrowing and spending to combat higher prices. New Fed Chair Kevin Warsh will deliver a high-profile speech Friday in Jackson Hole, Wyoming that will be closely watched by Wall Street for any signs of his thinking about next steps.

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. Separately, a second estimate from the government Wednesday showed that the economy grew at a sluggish pace in the April-June quarter, expanding at a 1.5% annual rate, down from 2.1% in the first quarter.

Still, consumer spending was healthy and businesses ramped up investment in AI infrastructure. Americans may be turning more cautious as inflation stays high. Consumer spending, adjusted for inflation, was unchanged in July.

On a monthly basis, overall inflation 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, higher than 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.