By Dan Burns
Aug 26 (Reuters) - Annual U.S. inflation held steady in July well above the Federal Reserve's 2% target for the 65th straight month, and the unexpected pause in the decline from a recent war-induced peak is likely to intensify the central bank's debate over whether interest rates should be lifted or held steady.
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Government data released on Wednesday also showed consumer spending decelerating modestly last month — and flatlining against inflation — while personal incomes rose faster than inflation, which could foreshadow an uptick in consumption as the year progresses.
Meanwhile, orders of major capital goods rebounded last month, led by transportation equipment orders, and shipments of durable goods outside the defense and aerospace sectors pointed to continued brisk business investment in the artificial intelligence space. Corporate profits rose at the second-fastest pace on record in the second quarter.
The clutch of reports together point to an acceleration in overall economic growth in the third quarter and should keep the Fed's focus squarely on containing inflation, economists said.
"The July consumer spending and core durable goods shipments data point to a strong real GDP (gross domestic product) growth rate in Q3 that looks to be running at least 3%," said Kathy Bostjancic, chief economist at Nationwide. That figure would be double the second quarter's unrevised annualized growth rate of 1.5%.
The data blitz occurred just two days before Fed Chairman Kevin Warsh delivers his debut keynote speech to the Kansas City Fed's annual economic symposium in Jackson Hole, Wyoming, an event global investors are keenly awaiting — particularly those in an inflation-wary government bond market.
"As Jackson Hole beckons, the Fed's challenge is clear: It still has considerable ground to cover before markets see 2% inflation as a credible outcome rather than a distant aspiration," said Olu Sonola, head of U.S. economics at Fitch Ratings.
The Personal Consumption Expenditures Price Index increased 3.7% in the 12 months through July, unchanged from June, the Commerce Department's Bureau of Economic Analysis said. Economists polled by Reuters had forecast a reading for PCE, which the Fed uses to set its target, of 3.6%.
The month-over-month figure also was higher than expected at 0.2% in July after falling 0.1% in June, which had been the weakest reading since April 2020. Economists had forecast a 0.1% increase.
Excluding energy and food prices, so-called core PCE — which Fed officials use as a guidepost for inflation's underlying run rate — held steady at 3.3% on the year while rising to 0.2% on the month from 0.1% in June.
