US inflation eases to 3.4% in July as gasoline prices fall, reducing pressure on Fed

Inflation moderates in July

US consumer prices rose 3.4% in the 12 months through July, down from 3.5% in June, the Bureau of Labor Statistics reported on 12 August. On a monthly basis, the Consumer Price Index advanced 0.1%, rebounding from a 0.4% decline in June that was the first monthly drop in six years. The data matched forecasts from economists polled by Reuters, Bloomberg, and Dow Jones Newswires. Core CPI, which excludes volatile food and energy components, rose 2.5% year-on-year, easing from 2.6% in June, and gained 0.2% on the month after being unchanged in June.

The July reading continues a downward trajectory from a three-year high of 4.2% in May, when gasoline prices surged above $4.50 a gallon at the height of the US-Iran war. Annual CPI stood at 2.4% in February before the conflict began in late February, climbed to 3.8% in March, peaked at 4.2% in May, and eased to 3.5% in June.

Energy and food provide relief

Energy prices fell 1.5% in July, including a 2.9% drop in gasoline prices, reflecting a brief ceasefire in the Middle East conflict. Gasoline averaged $4.064 a gallon in July compared with $4.184 in June, according to the Energy Information Administration. Prices at the pump had dropped below $3.80 in June and early July before rebounding later in July as fighting with Iran resumed. AAA reported the average at $4.04 a gallon on Wednesday.

On an annual basis, energy prices remained up 14.7%, with gasoline 24.6% higher than a year earlier and fuel oil up 39.1%. Food prices rose only slightly, with lettuce prices plunging 16.4% after an outbreak of the cyclospora parasite prompted a recall of iceberg lettuce from Mexico. Housing-related costs rose 3.2% year-on-year, and rising rents were a key driver of the monthly increase.

Federal Reserve faces competing pressures

The Federal Reserve left its benchmark overnight rate in the 3.50%-3.75% range at its July meeting, where three of twelve voting members called for a rate increase. Financial markets had priced a roughly 46% chance of a September rate hike before the CPI report; after the data, market odds fell below 40%. The Fed's next policy meeting is scheduled for 15-16 September, and policymakers will receive August CPI and employment reports before then.

Fed chairman Kevin Warsh, described as the new president of the Federal Reserve, has played down the significance of any single inflation report. Some Fed officials worry that successive supply shocks, including the Middle East conflict, alongside resilient demand from the AI buildout could keep inflation elevated without further action.

I don't expect any significant firework when the numbers come out. I don't really see the Fed either raising or lowering interest rates, unless things turn out badly for both unemployment and the CPI.

Wages lag and political pressure mounts

Wage growth came in at 3.2% year-on-year, according to labor data released the previous week, lagging the 3.4% inflation rate. The same report showed the economy lost 23,000 jobs in July. Democratic Senator Elizabeth Warren criticized the administration's handling of the economy in a statement on Wednesday.

Inflation is still too high. Prices are up 4.4 percent since Trump took office, and paychecks aren't keeping up.

President Donald Trump, in an interview released on Monday, called Iran "devious negotiators" and described his options in the war as either to "just bop along" and let Tehran fail economically or hit them "really, really hard." The high cost of living has soured many Americans' views of Trump and could weigh on Republican chances in the November midterm elections.