War, tariffs and AI are keeping pressure on prices as inflation remains stuck at 3.7%
Inflation remains at 3.7% for the second month, with global conflict, tariffs, and rising demand for technology driving costs higher, according to the Federal Reserve.
WASHINGTON —
Inflation held steady at 3.7% in July for the second consecutive month, according to the Commerce Department’s latest personal consumption expenditures report.
The Fed’s recent Monetary Policy Report identified three major sources of price pressure: the war with Iran, tariffs and demand connected to the artificial intelligence boom.
Gasoline and other energy goods fell 2.7% from June but were approximately 25% more expensive than in July 2025.
“It really is hard to know when the conflict in the Middle East will be resolved,” Ken Kim, a senior economist at KPMG, said.
The Federal Reserve’s report said tariff effects cannot be observed directly in official consumer-price data. However, pricing patterns suggest tariffs contributed in part to faster increases for import-heavy products, including household appliances and some consumer electronics.
July inflation data show prices for small electric household appliances, including products such as toasters, rose 2.2% in one month. Prices for major appliances declined, however, showing that tariffs are only one of several factors affecting prices.
New U.S. tariffs on Canadian imports add another potential source of pressure on domestic prices. Canada’s planned retaliatory tariffs on approximately $20 billion of American goods create a separate risk for U.S. exporters.
The Fed also said rapid price increases for computers and software likely reflect soaring demand for semiconductors used in data centers and other AI infrastructure.
Prices for personal computers, tablets and related equipment rose approximately 3.5% in July. Computer software and accessories were more than 21% more expensive than a year earlier.
Kim said he believes inflation may have peaked but warned that broad relief will take time.
“So it’s going to take a couple of years for inflation to get back to a level where the Fed’s comfortable,” Kim said.
The Fed’s latest Summary of Economic Projections shows policymakers expect PCE inflation to decline to 2.3% in 2027 before not reaching their 2% goal until 2028.
Kim said the latest report also strengthens the case for the Fed to raise interest rates. That could make credit cards, car loans and some mortgages more expensive as families continue facing elevated prices.