U.S. inflation slowed in July, with a measure of underlying price pressures also cooling, suggesting that elevated oil and gas prices have had a limited impact on broader economic costs. Consumer prices rose 3.4% in July compared to a year earlier, a slight decrease from 3.5% in June, the Labor Department reported Wednesday.
On a monthly basis, prices increased by 0.1% from June to July. This follows a period where inflation had been pushed higher by a series of economic shocks. These included tariffs imposed by President Donald Trump's administration, increased gas prices stemming from the U.S. war with Iran, and a surge in investment in artificial intelligence infrastructure that boosted computer chip prices.
Excluding volatile food and energy categories, core inflation saw a slight decrease, rising 2.5% in July from a year ago, down from 2.6% in June. Core prices increased by 0.2% from June to July. Monthly increases of around 0.2% could contribute to bringing inflation closer to the Federal Reserve's 2% target over time.
The latest figures could support Federal Reserve officials who believe the central bank can maintain its key interest rate at approximately 3.6% while inflation gradually declines as temporary factors fade. However, overall price increases have remained above the Fed's 2% target for more than five years, leading some economists to suggest that factors beyond temporary influences may be at play.
The cost of services, such as healthcare, restaurant meals, and car maintenance, has been rising at an average annual rate of more than 3%. These costs are not particularly sensitive to fluctuations in gas prices or AI investment. Rising service costs often reflect higher wages, with companies increasing prices to offset higher labor expenses. Yet, economists note that income growth has not kept pace with inflation.
This complex situation has left many economists and Federal Reserve officials seeking more information to ascertain the future direction of inflation. Consumers have adapted to rising costs through various strategies, including comparison shopping, using coupons, and reducing consumption of certain goods. Some retailers have responded by lowering food prices, which may have contributed to the cooling inflation figures in July.
However, other companies are still passing on higher costs to consumers. Sherwin-Williams, for instance, announced plans for an 8% price increase effective September 1, citing higher raw material costs. The company's CEO noted the impact of higher oil and related cost pressures, anticipating continued volatility.
The Federal Reserve remains divided on whether to raise its key interest rate to combat inflation. The Fed maintained its rate at approximately 3.6% at its last meeting, but the decision was not unanimous, with three officials favoring a rate hike. Fed Chair Kevin Warsh has indicated that interest rates could be part of the solution if inflation remains elevated, but not in isolation. This uncertainty has led investors to view the odds of a rate hike at the Fed's next meeting in September as roughly 50-50.