US Inflation Cooled Off in July

US inflation slowed last month and a measure of underlying price pressures also cooled, suggesting higher oil and gas prices from the Iran war are having only 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, reports the AP, when it was 2.4%. On a monthly basis, prices rose just 0.1% from June to July.

Inflation has been pushed higher by a series of shocks to the economy, including President 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 Fed—not to mention for consumers struggling with high gas and grocery prices—is how quickly those one-time effects will fade. Excluding the volatile food and energy categories, core inflation also slipped to 2.5% in July from a year ago, down from 2.6% in June. 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.

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. But incomes aren't growing fast enough to sustain inflation, economists note.