U.S. inflation cools slightly in July as energy prices retreat

U.S. inflation eased to 3.2% in July from 3.4% the prior month, as a retreat in energy costs offset persistent price pressures in services and shelter, according to preliminary data released by the Bureau of Labor Statistics on Tuesday.

The month-on-month increase of 0.2% matched expectations, signaling a gradual deceleration from the elevated levels seen in the first half of the year. Energy prices declined 2.3% in July, reversing a spring surge driven by supply disruptions and heightened geopolitical tensions. Gasoline prices fell 3.8%, while natural gas costs dropped 1.1%. However, food prices rose 0.4%, with grocery items up 0.3% and dining out costs increasing 0.5%.

Core inflation, which excludes volatile food and energy prices, held steady at 3.3% year-on-year, unchanged from June. Services inflation remained sticky at 5.2%, driven by rising rents and healthcare costs, while used vehicle prices surged 4.4% after a prolonged period of deflation. The data comes as Federal Reserve officials weigh whether additional interest rate hikes are warranted to bring inflation sustainably back to the 2% target.

The report follows a series of mixed signals on the U.S. economy, with retail sales and labor market data suggesting resilience despite higher borrowing costs. Economists polled by Reuters had forecast a 3.1% annual increase in headline inflation and a 0.2% monthly rise. The Fed’s next policy decision is scheduled for September, with markets pricing in a 60% chance of a 25-basis-point rate hike.

Persistent inflation in services and shelter has complicated the central bank’s efforts to calibrate policy, as wage growth and consumer spending remain robust. The July data does little to alter the broader narrative of sticky inflation, though the decline in energy prices provides some relief. Analysts caution that geopolitical risks, including ongoing conflicts and potential supply chain disruptions, could reignite price pressures in the coming months.