U.S. Inflation Eases Further to 3.4% in July as Energy Prices Cool

Inflation Moderates as Energy Shock Eases

The annual inflation rate in the United States decreased to 3.4 percent in July from 3.5 percent in June 2026, with the slowdown in line with expectations. Inflation moved further below the 2023 high of 4.2% reached in May, as the impact of the energy shock caused by the war with Iran continued to ease.

Energy and Shelter Trends

Gasoline prices rose 24.6% year-over-year, down from 26.7% in June, while fuel oil prices increased 39.1%, compared with 42.9% previously. Inflation also eased in shelter, to 3.2% from 3.3%, while food inflation remained unchanged at 3%. On a monthly basis, the CPI rose 0.1% as expected, rebounding from a 0.4% decline in June, with the index for shelter rising 0.1% and accounting for roughly two-thirds of the monthly increase, and food also going up 0.1%.

Core Inflation Weakens

Core consumer prices went up 0.2%, following a flat reading in June, while the annual core inflation rate eased to 2.5% from 2.6% in the previous month, matching forecasts. This decline in core inflation signals that price pressures are broadening beyond just energy-sensitive categories.

Implications for Fed Policy

The cooler inflation readings reinforce market expectations that the Federal Reserve will remain patient on rate hikes. According to Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, "In-line inflation will keep the 'no need to hike rates' narrative that took hold after last week's jobs report intact," though she noted there will be another round of inflation data before the September FOMC meeting, meaning the storyline could still change unless those numbers tell a much different story, with the Fed likely still positioned to leave rates unchanged next month.