WASHINGTON, July 10 - U.S. inflation "stepped up further this spring," the Federal Reserve reported to Congress on Friday, identifying a mix of factors that have increased price pressures since last year. The central bank highlighted the changing impact of tariffs, a rise in energy costs linked to conflict in the Middle East, and an intense buildout of artificial intelligence technology as contributors to the recent uptick in inflation.
The Fed noted that inflation has risen this year and remains elevated relative to the Federal Open Market Committee's longer-run objective of 2%. The report said the Personal Consumption Expenditures (PCE) Price Index - the Fed's preferred measure - was running at about double that 2% objective based on the most recent data through May.
At the same time, the document described the labor market as having "stabilized, with demand and supply roughly in balance." The June unemployment rate of 4.2% was characterized as still "low," though the report emphasized demographic forces that have restrained labor supply growth. Specifically, it cited a marked slowdown in immigration and ongoing declines in labor force participation driven by an aging population as leading to slower labor supply expansion.
This submission is the first monetary policy report to Congress issued under new Fed Chairman Kevin Warsh. Warsh is scheduled to appear before both House and Senate committees next Tuesday and Wednesday for the semiannual monetary policy reviews. He assumed the chairmanship in late May after the previous chairman's term ended.
The Fed has maintained a pause on interest-rate increases since December, yet investor expectations have shifted toward the possibility of rate hikes later in the year amid concerns about persistent inflation. The report specifically pointed to the near-term price pressures associated with the rapid deployment of AI infrastructure - noting that while the technology may eventually support lower inflation through productivity gains, the immediate effect includes increased demand for electricity, semiconductor chips and related materials used in the buildout.
By laying out these drivers, the Fed framed the current inflationary environment as the product of several concurrent forces rather than a single source. The report therefore signals to lawmakers that policymakers see inflation as still elevated and influenced by both global events and domestic investment trends, even as labor-market indicators show signs of balance.