July inflation report to provide crucial signs of where prices are headed

U.S. inflation slowed last month and a measure of underlying price pressures also cooled, suggesting higher oil and gas prices from the Iran war are only having a limited impact on broader costs in the economy

WASHINGTON -- U.S. inflation slowed last month and a measure of underlying price pressures also cooled, suggesting higher oil and gas prices from the Iran war are only having a limited impact on broader costs in the economy.

Consumer prices rose 3.4% in July from a year ago, down slightly from 3.5% in June, the Labor Department said Wednesday. But inflation is still higher than before the Iran war began in February, when it was 2.4%. On a monthly basis, prices rose just 0.1% from June to July.

The modest decline could ease pressure on the inflation-fighters at the Federal Reserve to raise their key interest rate to combat rising costs. Yet prices are still rising more quickly than average wages, underscoring the struggle many Americans have had with more expensive groceries, gas, and health care, trends that have taken on a high profile in the fast-approaching midterm elections.

Excluding the volatile food and energy categories, core inflation rose also slipped to 2.5% in July from a year ago, down from 2.6% in June. July's figure matches a post-pandemic low reached in January and February, before the Iran war.

Core prices rose 0.2% from June to July. Monthly increases at about 0.2% would be low enough over time to bring inflation closer to the Fed’s 2% goal.

Still, oil prices remain elevated and gas prices rose in late July and August, suggesting overall inflation could accelerate next month. On Wednesday, gas averaged $4.04 a gallon nationwide, 16 cents higher than a month ago, according to the motor club AAA.

Inflation has been pushed higher by a series of shocks to the economy, including President Donald Trump’s tariffs imposed last spring, higher gas prices stemming from the Iran war, and a surge in investment in artificial intelligence infrastructure that has boosted computer chip prices. The key question for the inflation-fighters at the Federal Reserve — not to mention for consumers struggling with high gas and grocery prices — is how quickly those one-time effects will fade or whether they will lead to persistently rising prices.

Wednesday’s figures could bolster officials at the Federal Reserve who believe the central bank can leave its key rate on hold at about 3.6% while inflation steadily declines on its own as those temporary factors fade.

Overall, price increases have stayed above the Fed's 2% target for more than five years, suggesting that more than temporary factors may be at work. The cost of services such as healthcare, restaurant meals, and car maintenance are on average rising at more than 3% annually, and they aren't particularly sensitive to gas prices or AI investment.

Rising costs for services often reflect higher wages, as companies charge more to offset the cost of higher pay.