AI has begun exacting its pound of flesh directly from consumers. And “Core Services” inflation remains hot.

By Wolf Richter for WOLF STREET.

The Fed-favored PCE price index today shed a slightly different and more ominous light on inflation for July than the CPI had done earlier this month. Energy prices were still up 15% from a year ago, and food inflation accelerated slightly to 2.4%. But beyond energy and food, the “core” PCE price index suffered from inflation in core services, where over 60% of consumer spending goes, and from the AI boom that has begun to exact its pound of flesh from consumers.

The core PCE price index – which excludes energy and food – rose by 0.25% in July from June (3.0% annualized, blue in the chart below).

Year-over-year, it rose by 3.35%, same increase as in June. The last four months produced the worst increases since October 2023 (red in the chart).

The Fed uses the core PCE price index as one of the yardsticks for its 2% inflation target (dotted purple line); it allows the Fed to “look through” an energy price spike and the subsequent energy price plunge.

The core PCE price index has been above the Fed’s 2% target since March 2021, and never got even close to the Fed’s 2% target. It bottomed out at 2.6% in April 2025 and has been moving away further from the 2% target ever since.

The all-items PCE price index – the other inflation index used by the Fed as its inflation yardstick – rose by 0.16% in July from June (+1.9% annualized, blue line in the chart below).

Year-over-year, the PCE price index rose by 3.7%, same increase as in June. Inflation in the five months of March through July was the worst since March 2023 (red line).

By this measure, inflation is nearly double the Fed’s inflation target of 2% (dotted purple line) and has been moving away from the target since May 2025.

The “core services” PCE price index rose by 0.27% in July from June (+3.3% annualized, blue in the chart below).

Year-over-year, the core services PCE price index rose by 3.7%. May, June, and July – all in this range – showed the worst increases since February 2025.

Core services account for over 60% of consumer spending. They include rent, healthcare, travel, lodging, transportation services (such as airline fares), insurance of all kinds, auto repair and maintenance, subscriptions of all kinds, financial services, etc. It’s where inflation is tough to battle because a lot of core services either lack adequate competition that consumers can leverage, or are difficult or impossible to shop around, such as healthcare. Companies that are confident they can raise their prices without losing customers, raise their prices, and consumers wail and gnash their teeth but pay them.

The durable goods PCE price index jumped by 0.37% in July from June (+4.6% annualized) and by 3.4% year-over-year.

A number of goods categories saw falling prices year-over-year, with some categories coming off the price spikes last year, and many had modest price increases.

But two categories experienced sharp price increases recently:

• Information processing equipment (computers, tablets, accessories, software) spiked by 1.4% month-to-month (+18% annualized) and by 15.5% year-over-year. It started suddenly in December. Over the past eight months, the PCE index for this category has spiked by 22%. This is where AI is exacting its pound of flesh directly from consumers.
• Jewelry and watches spiked by 2.0% month-to-month (+27% annualized) and by 14.8% year-over-year, as the years-long spike in gold prices is gradually getting passed on to consumers.

Food prices edged down in July, after the jump in June. Year-over-year, the index rose by 2.40%, the highest in three months.

Many food categories experienced price increases, and many experienced price declines. Egg prices fell further, continuing to unwind the avian-flu profiteering spike. Beef prices seem to have topped out and have begun to edge down. Coffee is still climbing up the spike. Sugar and sweets continue to head higher, as is fresh milk, and fresh seafood. Poultry and pork declined month to month and were roughly unchanged from a year ago.

The energy PCE price index fell by 1.5% in July from June, the second month in a row of declines, after the spike in the prior months.

Year-over-year, the index was still up by 15.3%. Within it, the gasoline index was still up by 25% from a year ago.

This chart shows the price level, not the year-over-year percentage change.

 

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