US inflation cools to 3.4% as wage growth lags prices

US consumer prices rose 3.4% in July from a year earlier, cooling from June's 3.5% and coming in below the 3.5% consensus forecast, as Iran war energy costs kept household budgets under pressure.

"Forces eroding inflation include rising rental vacancy rates that are restraining rent growth, a less onerous tariff regime than a year ago and moderating wage gains," David Kelly, chief global strategist at J.P. Morgan Asset Management, said. "However, the pace at which inflation declines depends on how long it takes to return to normal traffic through the Strait of Hormuz."

The monthly CPI rose 0.1% from June, while core inflation, which excludes food and energy, advanced 0.2%. Core prices rose 2.5% year-over-year, down from 2.6% in June. Energy prices, the primary driver of this year's inflation spike, continued climbing as Brent crude hit $90 a barrel and U.S. crude approached $84. The national average gasoline price rose to $4.03 a gallon, up from roughly $3 before the Iran conflict began in late February.

The data lands as the Federal Reserve weighs its next rate decision at the mid-September FOMC meeting. CME FedWatch showed roughly a 50-50 split between a hike and unchanged rates, while Cleveland Fed President Beth Hammack said Tuesday that "now is the time to act" to bring inflation back to the 2 percent target.

Wage Growth Trails Prices for Fourth Straight Month

Wage growth slowed to 3.2% over the year in July, the lowest increase since 2021, meaning inflation outpaced pay gains for the fourth consecutive month. "Even if you're making more money numbers-wise, with the way prices are rising, you have less money left over at the end of the month," Nicole Bachaud, economist at ZipRecruiter, said. "That's really going to impact the large consumer base of America, middle- and low-income households, who are really dependent on wage growth to help them remain economically viable."

Cory Stahle, senior economist at the Indeed Hiring Lab, said several data sources showing anemic wage growth and weak hiring indicate employers aren't "necessarily pulling out the stops to try to attract workers" because there isn't pressure to do so. He added that companies may be prioritizing health benefits over wage increases.

Core Pressures Persist Beneath the Surface

Outside of volatile energy swings, underlying inflation has proven more stubborn than Fed policymakers would like. Housing, airfares and auto insurance continue to post elevated increases, and the artificial-intelligence boom is fueling demand for computing infrastructure that pushes up construction materials and hardware prices. The 12-month inflation rate fell as low as 2.3% early last year before President Trump's tariffs began lifting goods prices, and the Iran war added fresh energy pressure this spring.

The inflation report follows Friday's jobs data showing the US shed jobs in July, with downward revisions of roughly 100,000 fewer jobs created over the previous two months than previously reported. Unemployment and overall labor force participation dropped, while prime-age labor force participation ticked up. The combination of cooling inflation and a softening labor market gives the Fed room to hold rates, but the persistence of core price pressures complicates that calculus.

Prediction markets had priced a tame reading, with Kalshi traders assigning less than a 55 percent chance that July CPI would exceed 3.3% and just a 15 percent chance above 3.4%. The actual 3.4% reading landed at the upper end of those expectations. Stock futures edged higher ahead of the release, reflecting hopes that the data would support a patient Fed stance.

Another CPI report will be published before the Fed's September meeting, giving policymakers one more data point. If core inflation continues running above the 2 percent target, the case for a hike strengthens. If energy prices moderate as the Strait of Hormuz situation stabilizes, the Fed could hold rates through year-end. For consumers, the key question is whether wage growth can catch up to prices — a gap that has now persisted for four months and shows no immediate sign of closing.

This article is for informational purposes only and does not constitute investment advice.