CPI report shows inflation eased in July to a 3.4% annual pace

Inflation eased for the second consecutive month, rising at a 3.4% annual pace in July, in line with economists' expectations and a signal that some consumer price pressures may be easing.

Economists polled by the financial data firm FactSet predicted July inflation rose at an annual rate of 3.4%.

The CPI, a basket of goods and services typically bought by consumers, tracks changes in prices over time.

Core CPI, which excludes the more volatile energy and food categories, also slowed in July, rising at an annual rate of 2.5%, down from 2.6% in June.

Inflation has eased since hitting a three-year high of 4.2% in May, when oil prices surged, sending gasoline costs soaring. Still, the inflation rate remains well above its pre-war level of 2.4% in February . Inflation also continues to outpace wage growth, which grew at an annual rate of 3.2% in July.

"Inflation is wiping out wage gains for many," said Heather Long, the chief economist of the Navy Federal Credit Union, in an email.

With the CPI cooling to a 3.5% annual pace in June, some economists say May could mark an inflationary peak for 2026, with some forecasting that inflation will continue to ease throughout the year.

July's inflation data will be critical to the Federal Reserve's September interest rate decision, following a surprisingly weak jobs report last week, which showed employers cut 23,000 jobs last month, rather than a forecast of 95,000 new hires.

Other than gasoline, prices for many categories — including food to shelter — are easing, which should keep the Federal Reserve on pause with interest rate hikes, Long said.

"This gives new Fed Chair Kevin Warsh some cover to wait and see what happens this fall before he has to act," she said in an email.

Higher interest rates are the Fed's most potent weapon to temper high inflation because costlier borrowing can dampen purchasing demand, helping to cool the economy.

Energy prices in July jumped 14.7% from a year ago, with the increase mostly driven by higher gas prices, which rose 24.6%, the Bureau of Labor Statistics said.

Oil prices surged in July as tensions escalated in the Strait of Hormuz and Iran-backed Houthi rebels in Yemen targeted shipping in the Red Sea. The escalating conflict pushed Brent crude, the international benchmark, from about $71 a barrel at the start of the month to above $100 by July 23.

While oil prices have eased since then, American drivers paid an average of $4.06 for a gallon of gasoline last month, data from the U.S. Energy Information Administration showed. That compares with an average of about $3 a gallon in February, before the Iran war began.