Fed Report: Inflation Rises Again This Spring, Labor Market Stabilizes
Alina Collins
The Fed's July 10 semi-annual report to Congress shows PCE inflation running at roughly twice its 2% target, driven by tariffs, energy costs, and AI infrastructure demand; the finding has shifted market expectations away from rate cuts and toward a possible hike later this year.
How bad is inflation right now?
As of May, the Fed's preferred gauge — the PCE price index — sits at roughly double the 2% target.
The report states plainly: "Inflation has risen this year and remains elevated relative to the 2% longer-run objective."
This means → the overshoot is not marginal. The Fed itself is no longer framing it as a near-miss.
What is driving prices higher?
The report names three forces: ongoing tariff effects, Middle East conflict pushing up energy costs, and an AI infrastructure building boom.
In plain terms = imported goods cost more, oil is pricier, and data-center construction is competing for power and chips — all three push prices up at once.
AI as an inflation driver is notable: Chair Warsh previously saw AI as a long-run productivity boost that would ease inflation, but in the near term the surge in demand for power and chips is adding to costs first.
What about the labor market?
The report calls the labor market "stabilized, with demand and supply roughly in balance." June unemployment stood at 4.2%, still low.
Supply-side pressures are building, though: sharply slower immigration and an aging population are pulling labor-force participation down.
This means → the headline jobs numbers look steady, but the labor pool itself is shrinking — wage pressure could resurface.
What does Warsh's first report signal?
This is the first monetary-policy report since Kevin Warsh replaced Powell as Fed Chair in late May.
Spring congressional hearings were delayed by the dispute between Powell and President Trump. Warsh will testify before the House on Tuesday and the Senate on Wednesday next week.
This reflects a difficult opening hand: inflation has not fallen as expected, and the new chair must explain the Fed's next move to Congress.
What does this mean for markets?
The Fed has held rates since last December. After the report, market expectations for a rate hike later this year rose.
In plain terms = the conversation has flipped — from "when will they cut?" to "could they actually raise?"
Whether inflation falls back on schedule is now the key test for the Fed's next policy move.
Content is for reference only, not financial advice.