United States: Inflation Slowed in July, but Energy Prices Could Again Weigh on Economic Conditions in August

After the spring surge, growth in the cost of living eased in both June and July. Inflation consequently declined from a recent peak of 4.2% in May to 3.4% in July. Even so, it remains elevated, with headline inflation standing at just 2.4% at the beginning of 2026 and 2.7% a year ago.

These movements are, of course, largely attributable to energy prices, whose path remains heavily influenced by developments in the conflict with Iran. The 2.9% decline in gasoline prices in July reflected the easing of tensions observed in late spring and early summer. Weekly pump prices reached a temporary low in early July. The catch is that they have since moved higher and are once again approaching US$4 per gallon on the national average. As a result, after two months in which energy prices made a negative contribution to monthly headline CPI growth, their contribution is likely to turn positive again in August.

US consumers also benefited from a rare decline in grocery prices in July. It was the first decrease since March. Most notably, meat prices fell 1.0% during the month.

Excluding food and energy, goods prices rose 0.2%, the strongest increase since September 2025. A marked decline in prescription drug prices was offset by higher prices for auto parts and IT equipment. Services prices excluding energy also increased 0.2%. The moderation in shelter-related costs appears to be continuing, helped in July by lower hotel accommodation prices. Airfares remain volatile and posted a monthly gain of 2.2% this time around.

Officials at the Federal Reserve, the White House and American consumers will welcome the easing of both headline and core inflation in July. A retreat in inflation after it climbed above 4% in the spring can only be viewed as positive news. On the one hand, however, the situation remains fragile, and gasoline prices could once again weigh on economic conditions as early as August. If the conflict with Iran drags on, upward pressure on energy prices will remain elevated, and cost-of-living concerns will continue to be a major issue ahead of the November 3 midterm elections. At the same time, renewed tariff threats could add further inflationary pressure. On the other hand, weaker employment conditions and lower inflation in July support a wait-and-see approach by the Federal Reserve and, if core inflation does not accelerate, policy rates could remain unchanged for the remainder of 2026.