U.S. inflation slowed slightly to 3.4% year-over-year in July, down from 3.5% in June, according to Labor Department data released Wednesday. Consumer prices edged up 0.1% on a monthly basis.
Core inflation, which excludes volatile food and energy costs, dropped to 2.5% from 2.6% in June, matching a post-pandemic low. Month-over-month core prices rose 0.2%.
The figures suggest that energy cost hikes linked to the war in Iran have had a limited broader impact on the economy so far, though gas prices climbed to a national average of $4.04 a gallon by mid-August.
The data comes as Federal Reserve officials remain split on interest rate policy. At its late-July meeting, the Fed voted 9-3 to keep its benchmark rate at about 3.6%.
Following the decision, Fed Chair Kevin Warsh signaled that higher borrowing costs remain an option to combat persistent inflation, though rate hikes would not be considered in isolation.
Persistent price increases in services continue to run above 3% annually, driven by wage growth, tariffs, and AI infrastructure investments.
Businesses are responding differently to these pressures; while retailers like Walmart have rolled back prices on some groceries, others are raising costs. For instance, paint manufacturer Sherwin-Williams plans an 8% price increase in September, pointing to higher oil prices and raw material volatility.
Economists note that overall income growth is not keeping up with rising costs, forcing consumers to adjust their spending. KPMG chief economist Diane Swonk highlighted that unconventional economic conditions continue to complicate forecasts for where inflation is headed.
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