Dive Brief:

• Inflation held steady last month, giving the Federal Reserve room to leave borrowing costs unchanged and see if price pressures from tariffs and the U.S.-Iraq conflict will ease in coming months.
• The core personal consumption expenditures price index rose 0.2% in July and 3.3% from a year earlier, the Bureau of Economic Analysis reported Wednesday. Disposable income for Americans outpaced inflation, increasing 0.5% last month.
• A sufficient number of Fed policymakers at their scheduled Sept. 15-16 meeting “will want to wait to see more data before making a decision to raise rates,” Chris Zaccarelli, chief investment officer for Northlight Asset Management, predicted in a note. Although not all inflation data is favorable, “today’s data should be enough to have caution — e.g. leaving rates unchanged — be the higher priority” at the Fed, he said.

Dive Insight:

Three central bank policymakers concerned about inflation dissented against a decision last month to leave the federal funds rate unchanged. They called for a quarter-point increase in the main rate from the current level between 3.5% and 3.75%.

During the July 28-29 policy meeting, several central bank officials voiced concerns about price pressures and noted that the central bank may need to raise the benchmark interest rate in the future, according to minutes of the gathering. Inflation has exceeded the Fed’s 2% target for more than five years.

“Should evidence of sustained inflation progress not materialize, I believe it will be appropriate to tighten policy soon to ensure we deliver price stability in a reasonable time frame,” Boston Fed President Susan Collins said Tuesday.

“In the coming months, I will be looking for evidence that inflation is durably returning to 2%,” she said, flagging the prospect of limited increases in tariffs and “some degree of reopening” for oil shipments through the Strait of Hormuz.

Following release of the inflation data, traders in interest rate futures trimmed the odds that policymakers will cut the federal funds rate at the next policy meeting to 36.1% from 39.6%.

The slowing economy argues for a wait-and-see approach by the central bank. Gross domestic product grew at a 1.5% annualized rate during the second quarter, slowing from a 2.1% gain during Q1, the BEA said.

A souring mood among U.S. households this quarter may weigh on economic growth.

Despite an increase in disposable income, personal consumption expenditures rose just 0.2% last month compared with a 0.4% gain in June, the BEA said.

Consumer confidence fell last month amid growing pessimism about prospects for jobs, income and business conditions, The Conference Board said Tuesday.

A gauge of consumer confidence declined in August for the second consecutive month, decreasing to 89.4 from 90.2 in July, the research group said in a monthly survey report.

Written responses on the economy were gloomier than in July, focusing on rising fuel prices, war, inflation, food, trade and jobs, The Conference Board said.