Inflation Was 3.4% in July, Down Slightly From the Previous Month

The annual inflation rate fell slightly in July but a key measure of underlying price trends remained moderate last month.

Stop-and-start peace negotiations in the Middle East brought a respite for gasoline prices. And so-called core prices, which exclude the volatile food and energy categories, rose by 0.2% in July from the previous month, a relatively modest increase offering hope that broader price pressures could be abating.

Underlying inflation trends are especially decisive right now for the Federal Reserve, where policymakers are grappling with whether and when to raise interest rates.

The inflation rate cooled to 3.4% in July, the Labor Department said Wednesday. It was lower than June’s 3.5%.

Core prices rose by 2.5% over the past 12 months, down from 2.6% in the year through June.

Iran war developments have jolted energy markets since the conflict began in February.

For much of July, improved optimism for a peace deal pulled down gasoline prices, although they have rebounded more recently. Last month, gasoline prices were down 2.9% versus June. Even so, gasoline prices remained 25% higher than a year earlier.

The relatively modest increase in underlying inflation may relieve some immediate pressure on the Fed to raise interest rates in September.

Wall Street was especially tuned to this inflation report because Fed officials signaled they were watching it more closely too.

Officials have for the past year forecast that inflation would return to their 2% goal without further rate increases, but more of them had changed their view in favor of raising rates.

The Fed will have one more month of inflation data before its Sept. 15–16 policy meeting.

Interest-rate futures recently showed that traders see a 58% chance that the Fed holds rates steady at its next meeting, according to CME Group, up from 54% just before the report and 52% Tuesday.

Price increases have cooled off since the searing inflation that followed the Covid-19 pandemic. But getting the inflation problem fully under control has proved an enduring challenge.

The 12-month inflation rate fell as low as 2.3% early last year, but it rebounded as President Trump’s tariffs began lifting goods prices.

At the start of this year, it looked like the inflation rate was on track to resume cooling. But higher energy costs from the Iran war boosted inflation once again this spring. Separately, the artificial-intelligence boom is fueling a frenzy of demand for computing infrastructure—pushing up prices for the necessary construction materials and hardware to build it.

The five-month-old Iran war has entered an uncomfortable stalemate, with Iranian leverage over the Strait of Hormuz foiling the White House’s attempts to end the conflict on terms favorable to the U.S.

Stop-and-go progress toward a peace deal helped ease gasoline prices from more than $4.50 a gallon in May. But they are still at roughly $4 a gallon, according to AAA, up from about $3 a gallon before the conflict started at the end of February.

Outside of big recent swings in energy prices, underlying inflation trends have been more stubborn than Fed policymakers would like. For inflation to fall sustainably back toward the Fed’s goal of 2%, the economy likely needs not just cheaper gasoline, but also cooler increases across categories such as housing, airfares and auto insurance.

Whether companies can keep passing along higher prices to customers across the rest of the economy will depend in large part on the financial health of shoppers. Consumers have been resilient so far, but many are exhausted from five years of elevated inflation and they are facing an uncertain labor market.