Inflation cooled in July as gas prices fell

Gas prices rose in late July and August, suggesting overall inflation could accelerate next month. (David Zalubowski/AP)

WASHINGTON — U.S. inflation slowed last month and a measure of underlying price pressures also cooled, suggesting higher oil and gas prices from the Iran war are only having a limited impact on broader costs in the economy.

Consumer prices rose 3.4% in July from a year ago, down slightly from 3.5% in June, the Labor Department said Aug. 12. But inflation is still higher than before the Iran war began in February, when it was 2.4%. On a monthly basis, prices rose just 0.1% from June to July.

The modest decline could ease pressure on the inflation-fighters at the Federal Reserve to raise their key interest rate to combat rising costs. Yet prices are still rising more quickly than average wages, underscoring the struggle many Americans have had with more expensive groceries, gas, and healthcare, trends that have taken on a high profile in the fast-approaching midterm elections.

Excluding the volatile food and energy categories, core inflation rose also slipped to 2.5% in July from a year ago, down from 2.6% in June. July's figure matches a post-pandemic low reached in January and February, before the Iran war.

Core prices rose 0.2% from June to July. Monthly increases at about 0.2% would be low enough over time to bring inflation closer to the Fed’s 2% goal.

Still, oil prices remain elevated and gas prices rose in late July and August, suggesting overall inflation could accelerate next month. On Aug. 12, gas averaged $4.04 a gallon nationwide, 16 cents higher than a month ago, according to the motor club AAA.

JUST IN: Inflation eased a bit in July. CPI inflation cooled slightly in July to 3.4% (down from 3.5% in June and 4.2% in May). But beware: Rising gas prices due to the war in Iran remain a key risk.

The monthly gain was +0.1%. Energy costs, restaurant costs and medical… pic.twitter.com/h1LzdlgoG4 — Heather Long (@byHeatherLong) August 12, 2026

Inflation has been pushed higher by a series of shocks to the economy, including President Donald Trump’s tariffs imposed last spring, higher gas prices stemming from the Iran war, and a surge in investment in artificial intelligence infrastructure that has boosted computer chip prices. The key question for the inflation-fighters at the Federal Reserve — not to mention for consumers struggling with high gas and grocery prices — is how quickly those one-time effects will fade or whether they will lead to persistently rising prices.

The new figures could bolster officials at the Federal Reserve who believe the central bank can leave its key rate on hold at about 3.6% while inflation steadily declines on its own as those temporary factors fade.

Overall, price increases have stayed above the Fed's 2% target for more than five years, suggesting that more than temporary factors may be at work. The cost of services such as healthcare, restaurant meals and car maintenance are on average rising at more than 3% annually, and they aren't particularly sensitive to gas prices or AI investment.

Rising costs for services often reflect higher wages, as companies charge more to offset the cost of higher pay. But incomes aren't growing fast enough to sustain inflation, economists note.

It's a confounding situation that has left many economists — and Fed officials — seeking more information to determine where inflation is headed.

BREAKING: the national average is now at its highest ever level this late in the calendar year, according to GasBuddy data. Meaning the national average has never been above $4/gal after Aug. 12 in any previous year- ever. — Patrick De Haan (@GasBuddyGuy) August 12, 2026

“You've got all these things that are just not the way the economy used to behave,” Diane Swonk, chief economist at KPMG, said.

For many consumers, years of sharply rising grocery prices have led them to adopt a wide range of coping strategies, from comparison shopping, to couponing, to cutting back on favorite foods.

Some retailers, such as Walmart, have responded by rolling back food prices, a trend that could have lowered July's inflation figures. Yet many other firms are still passing on higher costs.

Paint company Sherwin-Williams is planning an 8% price increase effective Sept. 1 to offset higher raw material costs, CEO Heidi Petz told analysts late last month. She said that because of the company’s strong relationships with suppliers, it was able to delay price increases until now.

“We are seeing the impact of higher oil and related cost pressures, and we expect continued volatility throughout the balance of the year,” she said.

The Aug. 12 report comes as the Federal Reserve is sharply divided over whether it should hike its key interest rate to combat inflation. The Fed kept its rate unchanged, at about 3.6%, at a meeting late last month. But the vote was 9-3, with three dissenters favoring a rate hike.

And at a July 29 news conference explaining the decision, chair Kevin Warsh was vague about the Fed's next steps, in keeping with his focus on reining in the central bank's previous willingness to signal whether it was prepared to raise or cut borrowing costs.

“If inflation continues to be elevated ... interest rates could well be part of that solution," he said. “But I wouldn't say it's in isolation.”

Long-term interest rates rose after Warsh's comments, suggesting investors worried that inflation could worsen in the coming months and the Fed might not lift borrowing costs to fight rising prices.

Complicating matters, the government said last week that employers had cut jobs in July, a sign of potential economic weakness. The Fed typically avoids rate hikes when hiring is faltering, because higher borrowing costs could slow the economy further.

AP Writer Anne D'Innocenzio contributed to this report from New York.