US PCE inflation stalls at 3.7%: What it means for portfolio positioning

• July PCE and core PCE inflation held steady at 3.7% YoY and 3.3% YoY, respectively, keeping inflation well above the Fed’s 2% target.
•  Energy, food and semiconductor costs, alongside the potential for further tariff escalation, present meaningful upside risks that could keep inflation elevated in the months ahead.
•  Softening consumer confidence, weak real wage growth and fading support from tax refunds suggest that the strong consumption momentum seen in 1H26 may be difficult to sustain.
• We continue to favour quality companies and the digital economy sector, while remaining cautious on loss-making companies and consumer discretionary stocks.

US inflation, as measured by the Personal Consumption Expenditures (PCE) Price Index, held steady at 3.7% year-on-year (YoY) in July 2026, above expectations of 3.6% and remaining well above the Federal Reserve’s 2% target. On a monthly basis, headline PCE inflation accelerated to 0.2% from -0.1% in June, exceeding expectations of a 0.1% month-on-month (MoM) increase.

Core PCE inflation, which excludes the volatile food and energy components, likewise held steady at 3.3% YoY, in line with expectations. On a monthly basis, core PCE inflation rose to 0.2% from 0.1% in June, also in line with expectations.

Goods inflation was unchanged at 3.7% YoY, with furnishings and durable household equipment easing (0.4% vs. 1.5%), while recreational goods and vehicles accelerated (8.6% vs. 2.3%). Gasoline and other energy goods also moderated slightly (25.1% vs. 26.3%).

Services inflation was similarly unchanged, with housing (3.2% YoY vs. 3.2%), healthcare (3.0% vs. 3.0%), and food services (3.4% vs. 3.4%) remaining stable. Transportation services, meanwhile, edged lower to 7.1% from 7.3%.

Figure 1: US inflation remains unchanged

Multiple forces could keep inflation elevated

July’s PCE data reinforces our view that the path towards the Fed’s 2% inflation target is likely to be a prolonged one. While headline inflation remains below its recent peak of 4.1% in May, it has stalled at 3.7% rather than continuing its downward trajectory. The lack of progress is even more apparent in core inflation, which has remained around 3.3% since March. As Fed Chair Kevin Warsh highlighted at the recent Jackson Hole conference, underlying inflation trends have not meaningfully improved, with 54% of PCE components recording price increases above 3%, compared with just 32% in the two decades preceding the COVID-19 pandemic.

Looking ahead, we see several factors that could keep inflation elevated and make the journey towards the Fed’s 2% target challenging.

Energy prices remain a key upside risk. The reopening of the Strait of Hormuz remains highly uncertain, with the US-Iran negotiations at an impasse. Both crude oil and fuel prices remain above pre-war levels. Importantly, even if hostilities were to end and crude oil prices declined, fuel prices could remain elevated in the near term due to refining bottlenecks. Refineries in the Gulf have been damaged by the US-Iran conflict, while Russian refining capacity has also been disrupted by Ukrainian drone strikes. With less refining capacity available, the supply of refined petroleum products remains constrained, keeping fuel prices elevated relative to crude oil. This is reflected in elevated crack spreads, which measure the price differential between refined petroleum products and crude oil.

Food and semiconductor costs could also serve as additional sources of inflationary pressure. Food production is being affected by a combination of adverse weather, geopolitical conflicts, and higher fertiliser and fuel costs, pushing the UN Food and Agriculture Organization’s Food Price Index to a three-year high of 131.1 in July.

Meanwhile, rising memory chip prices are increasing the cost of everyday electronics as the rapid build-out of AI data centres intensifies demand for semiconductors. This pressure could be exacerbated if the Trump administration proceeds with new tariffs on semiconductors, which it is considering as part of efforts to encourage greater investment in US chip manufacturing. Politico reported last week that the tariffs under consideration could extend beyond semiconductors themselves to goods that contain them, including laptops, gaming consoles, and data-centre servers.

Related article: The Middle East ceasefire is dead. Rates are likely to stay higher for longer.

Beyond semiconductors, the broader tariff landscape also warrants attention. The US has imposed a 50% tariff on a range of Canadian goods under the previously unused Section 338 of the Tariff Act of 1930, following the collapse of US-Canada trade talks. However, the affected imports totalled just USD 20.2 billion in 2025, equivalent to 5.3% of the USD 382 billion of goods the US imported from Canada and less than 0.6% of total US goods imports. The Yale Budget Lab estimates that the average statutory tariff rate will rise from 11.0% currently to 11.8% by year-end based on scheduled tariff increases, or 11.5% excluding the Section 338 tariffs on Canada. Given the relatively small share of imports affected, we expect the latest measures to have only a modest impact on overall economic activity and inflation.

That said, the greater risk lies in further escalation. Canadian Prime Minister Mark Carney has announced dollar-for-dollar retaliation beginning September 8, while President Donald Trump has threatened to raise tariffs on Canadian automotive goods to 50% from January 1. Risks of additional tariffs elsewhere also remain, with ongoing Section 301 investigations into alleged industrial overcapacity involving China and more than a dozen other economies, alongside Section 232 investigations that could result in additional product- or sector-specific tariffs on national security grounds.

In short, upside risks to inflation remain meaningful, making the path towards the Fed’s 2% target increasingly challenging. We therefore continue to see a meaningful possibility of rate hikes should inflation fail to move towards the Fed’s 2% target “clearly and at sufficient speed,” in Warsh’s words.

Related article: Jackson Hole takeaway: Inflation is still too high; rates are likely to stay elevated

Favour quality and structural growth in a higher-for-longer environment

In a higher-for-longer interest rate environment, we remain cautious on loss-making companies, which are more vulnerable to rising funding costs and pressure on valuation multiples. Instead, we favour quality companies with strong balance sheets, consistent earnings, and high returns on equity, as these businesses are better positioned to withstand elevated borrowing costs and a more challenging macroeconomic backdrop.

We also maintain our cautious stance on consumer discretionary stocks, where elevated inflation, higher-for-longer interest rates, and weakening consumer confidence form a difficult combination. While consumption has held up better than expected in the first half of the year, there are signs that this resilience may be beginning to fade. Inflation-adjusted consumer spending was flat MoM in July, while the Consumer Confidence Index fell to 89.4 in August from 90.2 in July, its lowest level since January, as households became more pessimistic about business conditions and the labour market over the next six months. Taken together, these indicators suggest that the strong consumption momentum seen in 1H26 may be difficult to sustain.

Corporate earnings calls echo this tension between resilience and strain. Visa CFO Chris Suh struck a more upbeat tone, noting that both discretionary and non-discretionary spending volumes remained strong, with no signs of weakening among lower-spending consumers. Walmart offered a more tempered view, observing that the consumer environment was softer than in February, with many households becoming more deliberate in managing their budgets. The strain is particularly evident in big-ticket categories, with Home Depot and Lowe's continuing to flag weak demand for large-scale home improvement projects. We expect this weakness to persist, as high interest rates continue to keep financing and mortgage costs elevated, making large-ticket purchases increasingly difficult for households to afford.

Importantly, consumer surveys point to further moderation in spending ahead. McKinsey’s ConsumerWise research, conducted in late July and early August, found that a greater share of consumers intended to spend less across most discretionary categories over the next three months compared with the previous quarter. This more cautious outlook is reinforced by mounting pressure on household purchasing power. Average gasoline prices remain above USD 4 per gallon, while the boost from higher-than-usual tax refunds that supported spending earlier in the year is likely to fade as most refunds have now been paid out. Real wage growth also remains weak, with real average hourly earnings declining 0.2% YoY in July, while real disposable personal income grew by only 0.5% YoY. With purchasing power under pressure and temporary supports to spending fading, consumers have less capacity to absorb persistently elevated prices without cutting back on discretionary spending. That said, we do not expect a collapse in consumer spending, given a stable labour market and continued spending by high-income households.

Against this backdrop of consumer caution, we remain constructive on the digital economy where structural tailwinds from AI adoption and sustained infrastructure investment continue to support long-term earnings growth, providing  greater resilience to macroeconomic headwinds. While rising capital expenditure has weighed on investor sentiment towards Big Tech, these companies continue to deliver strong earnings growth, and we view current valuations as attractive relative to their growth trajectory.

Related article: Big Tech earnings 2Q26: Demand confirmed; Higher burden of proof

Table 1: Recommended products

Sector/Style	Recommended Products
Digital Economy	•      Fidelity Global Technology A-ACC-USD •      Eastspring Investments Unit Trusts - Global Technology SGD •      Invesco NASDAQ Internet ETF (NASDAQ: PNQI)
Quality	•      JPMorgan U.S. Quality Factor ETF (NYSE: JQUA)

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.