U.S. inflation cools to 3.4% in July, below forecasts

U.S. consumer price inflation slowed to 3.4% year-on-year in July, down from 3.5% in June and below economists' forecasts of 3.5%, according to data released by the Bureau of Labor Statistics.

The core Consumer Price Index (CPI), which excludes volatile food and energy prices, increased 3.2% from a year earlier, also below the 3.3% estimate. On a monthly basis, the CPI rose 0.2%, matching June's gain, while core CPI increased 0.2% after a 0.1% rise in the prior month.

Energy prices fell 2.0% month-on-month, led by a 5.0% drop in gasoline costs, while food prices rose 0.2%. Shelter costs, a key driver of inflation, increased 0.4% for the month, contributing to the overall rise in core prices.

The report follows recent comments from Federal Reserve officials signaling caution about the pace of policy easing, despite signs of moderating inflation. Market expectations for a September interest rate cut have strengthened slightly, with traders pricing in a roughly 70% chance of a reduction, according to CME Group's FedWatch tool.

The U.S. dollar weakened modestly against major peers following the data, while Treasury yields edged lower. Economists caution that inflation remains above the Fed's 2% target, keeping policy restrictive but with potential for gradual easing in coming months.