US Inflation Remains Stubborn; Interest Rate Hikes Loom

US inflation remains a key concern for the Federal Reserve ahead of its September monetary policy meeting. The Personal Consumption Expenditures (PCE) price index—the Fed's preferred inflation gauge—rose 3.7% year-on-year in July 2026, unchanged from June and well above the central bank's 2% target. Core PCE inflation, which excludes food and energy, also held steady at 3.3%.

Meanwhile, July Consumer Price Index (CPI) data showed a more moderate rise. The CPI increased 0.1% month-on-month and approximately 3.4% year-on-year, while core CPI rose 0.2%. Although the monthly pace of increase slowed, the annual inflation rate indicates that price pressures in the US have not yet fully subsided.

What Is Keeping US Inflation High?

A major factor is energy prices. The protracted conflict between the United States and Iran has raised concerns regarding global oil supplies. The PCE index had previously hit 4.1% in May—a three-year high—after the conflict drove a sharp spike in energy prices.

This issue returned to the spotlight after US-Iran tensions escalated in early September. Rising oil prices can ripple across various economic sectors, as energy is a critical component of costs ranging from transportation and production to goods distribution. The longer oil prices remain elevated, the greater the risk of renewed inflationary pressure.

Another factor stems from US import tariff policies. Tariffs make various foreign goods and raw materials more expensive. Producers face rising costs, which can be passed on to consumers through higher selling prices. Reuters has noted that tariffs have contributed to rising prices for various goods since last year, while the conflict with Iran has intensified this pressure.

Price pressures are also evident in the manufacturing sector. The ISM Manufacturing Prices Paid index stood at 71.1 in August, indicating that producers continue to face significant increases in input costs. Prices for aluminum, steel, copper, fuel, electronic components, and semiconductors reportedly continue to rise. Supply chain disruptions and longer delivery times are further intensifying price pressures.

At the same time, the US economy remains robust enough to sustain demand. Consumer spending and business investment continue to show resilience, while the labor market has not yet experienced significant weakening. The combination of sustained strong demand and rising production costs makes the task of bringing inflation back toward the 2% target increasingly difficult.

Impact on the Fed

Persistently high inflation increases pressure on the Federal Reserve to maintain a tight monetary policy or even raise interest rates again. Fed Chair Kevin Warsh has stated that the central bank still has work to do if it lacks confidence that inflation is moving sustainably toward the 2% target.

Markets are currently pricing in a roughly 66% probability that the Fed will raise interest rates by 25 basis points at the September 15–16 meeting—a sharp increase from expectations held just weeks earlier. The US benchmark interest rate currently stands in the 3.50%–3.75% range.

Impact on Markets

High US inflation typically acts as a positive driver for the US dollar and Treasury yields, as markets anticipate that interest rates will remain elevated for longer or rise further. Conversely, this environment can weigh on non-yielding assets like gold, particularly if the rise in real yields and the dollar outweighs safe-haven demand.

Stock markets may also face pressure, as rising interest rates increase corporate borrowing costs and make stock valuations particularly in the technology sector appear more expensive. For US consumers, high inflation means purchasing power remains under strain due to rising prices for goods and services, while the costs of credit, mortgages, and loans may stay high for an extended period.

Newsmaker Analysis: The current US inflation issue stems from multiple factors. Oil prices driven by geopolitical conflict, import tariffs, high raw material costs, supply chain disruptions, and a resilient economy are all simultaneously sustaining price pressures. As long as the PCE remains well above the 2% target and energy prices do not subside, the Fed’s room to adopt a dovish stance remains limited. For the market, these conditions tend to support the dollar and Treasury yields, while gold and risk assets may continue to face pressure. The next focus is this week's US labor data and the August CPI, which will provide insight into whether inflation is beginning to ease or re-accelerate.