The US inflation rate eased to 3.4% in July, matching forecasts from economists and falling from 3.5% in June. On a monthly basis, the Consumer Price Index rose 0.1% in July after declining 0.4% in June, according to the US Bureau of Labor Statistics. Core inflation, which excludes food and energy, rose 0.2% for the month and 2.5% from a year earlier. The modest inflation reading led financial markets to reduce expectations for a rate increase by the Federal Reserve at its upcoming September meeting. Market estimates showed about a 38% chance of a rate hike shortly after the report, down from more than 48% the previous day.
Energy prices remain significantly higher than they were a year ago because of disruptions associated with the conflict in the Middle East, but energy costs actually declined during July. The BLS reported that the energy index fell 1.5% for the month, while gasoline prices dropped 2.9%. Compared with July 2025, however, energy prices were 14.7% higher and gasoline prices were 24.6% higher. Shelter costs rose 0.1% during July and accounted for roughly two-thirds of the overall monthly CPI increase.
Oil prices have remained a concern because of geopolitical tensions involving the Strait of Hormuz and disruptions associated with the conflict involving Iran. Despite those pressures, the July CPI showed relatively little pass-through from the oil-price shock to consumer prices, according to Reuters. Economists said the report reduced the likelihood that the Federal Reserve would raise interest rates at its September meeting, although inflation remains above the central bank’s 2% target.
The Federal Reserve will still receive additional inflation and employment data before making its September decision. The August employment report is scheduled for release on September 4, while the August CPI report is scheduled for September 11, according to the Bureau of Labor Statistics. The Federal Open Market Committee is scheduled to meet September 15 and 16.
Inflation reached its highest annual level so far in 2026 in May, when the CPI was 4.2% higher than a year earlier. The annual rate then eased to 3.5% in June and 3.4% in July. By comparison, annual inflation was 2.4% in February. The recent figures therefore show inflation retreating from its spring peak, although it remains above the Federal Reserve’s long-term 2% goal.
Market analysts are watching closely for signs that this cooling trend will continue through the rest of the year. The Fed’s next move will depend on how future inflation data align with recent labor-market weakness and other economic indicators. According to The Motley Fool, the probability of a September rate increase fell from more than 48% before the CPI report to roughly 38% afterward, while the probability that the Fed would leave rates unchanged rose to about 62%.
Investors and economists are also focused on the July Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred inflation gauge. The Bureau of Economic Analysis is scheduled to release the July PCE figures on August 26. The most recent PCE report showed that the index was 3.7% higher in June than a year earlier.
The July inflation figures show a mixed picture. Overall consumer inflation continued to moderate, while energy costs remained substantially higher than a year earlier despite falling during the month. With another jobs report, another CPI report and the July PCE report still to come before the September meeting, the Federal Reserve’s next decision remains uncertain, but financial markets currently lean toward the central bank keeping interest rates unchanged.
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