Key Takeaways:
Inflation cooled to 3.4% in July, but sticky core prices and a hawkish Fed official keep a September rate hike on the table.
US consumer prices rose 3.4% in the year through July, easing from 3.5% but still outpacing wage growth, as Federal Reserve officials weigh whether to resume rate increases at their September meeting.
"I don't really see the Fed either raising or lowering interest rates, unless things turn out badly for both unemployment and the CPI," said Sung Won Sohn, a finance and economics professor at Loyola Marymount University.
The consumer price index rose 0.1% from June, matching the consensus forecast, after a 0.4% drop the prior month — the first decline in six years. Core CPI, which strips out food and energy, climbed 0.2% month over month and 2.5% from a year earlier, down from 2.6%. Gasoline prices fell 2.9% in July, averaging $4.064 a gallon versus $4.184 in June, according to Energy Information Administration data. Shelter costs rose 0.1%, accounting for roughly two-thirds of the monthly all-items increase, while food prices gained 0.1% and the cost of eating out rose 0.3%.
The data lands as the Fed, which has held rates unchanged since the war with Iran began, prepares for a mid-September decision. Cleveland Fed President Beth Hammack wrote Tuesday that "now is the time to act," warning that waiting would make it "more expensive for the American people." Economists expect core PCE inflation — the Fed's preferred gauge — to hold at 3.3% year over year, leaving some to anticipate a hike next month.
Wage growth is running at 3.2% year over year, below the inflation rate, while average hourly earnings slipped 0.2% from a year earlier, according to the Bureau of Labor Statistics. That gap keeps pressure on households even as the headline number cools.
Energy remains the primary driver of this year's inflation spike, with Brent crude touching $90 a barrel Wednesday morning and US crude near $84. The national average gasoline price rose Wednesday to $4.03 a gallon, suggesting the July decline is already in the rearview mirror. The International Energy Agency on Wednesday cut its 2026 oil demand forecast again, citing the closure of the Strait of Hormuz, through which about one-fifth of global oil supplies usually transit.
Used-car prices, education and communication goods, and airfares were expected to lift core inflation, while motor vehicle insurance declined. The benign core CPI readings may not translate to the core PCE measure, which weights components differently — a divergence that leaves some economists, including Bank of America Securities' Stephen Juneau, expecting the Fed to tighten in September. "A report in line with our expectations would strengthen the case for the Fed hiking in September," Juneau said.
The high cost of living has soured many Americans' views of the administration and could weigh on the Republican party's chances in November's midterm elections, which will determine control of Congress. Trump won the 2024 presidential election largely on a promise to lower inflation.
This article is for informational purposes only and does not constitute investment advice.
