U.S. consumer spending remained solid in July while underlying inflation picked up, as tariffs on imports pushed prices higher for certain goods. Despite the price pressures, the data are unlikely to prevent the Federal Reserve from cutting interest rates next month, amid a softening labor market.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% in July following an upwardly revised 0.4% gain in June, according to the Commerce Department’s Bureau of Economic Analysis. Adjusted for inflation, consumer spending increased 0.3%, driven largely by goods purchases and supported by wage growth and low layoffs.

Tariffs imposed under President Donald Trump have raised costs for businesses, prompting caution in hiring. Over the past three months through July, employment gains averaged 35,000 jobs per month, compared to 123,000 during the same period last year.

Inflation remained elevated. The Personal Consumption Expenditures (PCE) Price Index rose 0.2% in July, matching expectations, and 2.6% year-over-year, consistent with June. Excluding volatile food and energy components, the core PCE Price Index increased 0.3% month-over-month and 2.9% year-over-year—the highest since February. The pickup was driven in part by rising service costs, including portfolio management fees, live sports, and entertainment, while goods prices saw more modest gains.

Many businesses rushed to import merchandise before tariffs took effect, while others absorbed higher costs or diversified supply chains. As most levies are now in place, companies are increasingly passing these costs onto consumers. Durable goods such as cars, household furniture, and sporting equipment contributed significantly to the July spending increase, helped by promotions including Amazon’s Prime Day.

Despite elevated inflation and solid consumption, traders continue to expect a 25-basis-point rate cut at the Fed’s September 16-17 meeting, with roughly an 87% probability. Fed Chair Jerome Powell, speaking at the Jackson Hole conference last week, acknowledged the visible impact of tariffs on prices while signaling openness to easing policy in response to rising labor market risks.

Wages and salaries rose 0.6%, the most since November, while real disposable income edged up 0.2% and the saving rate remained steady. Looking ahead, additional government data will provide further insight into employment trends, with economists projecting job growth of under 100,000 for the fourth consecutive month and a modest uptick in the unemployment rate in August.

Overall, July’s PCE report highlights resilient consumer demand in the face of tariff-driven inflation, supporting spending growth while leaving the Fed room to cut rates to cushion the slowing labor market.