US Inflation Cools to 3.4% in July as Energy Prices Fall

US consumer prices rose 3.4% year over year in July, down from 3.5% in June, with the headline index up just 0.1% on the month. Core CPI, which strips out food and energy, eased to 2.5% year over year and rose 0.2% month over month. Energy prices fell for a second consecutive month, the single largest contributor to the cooling headline figure.

The print landed roughly in line with forecasts, which matters more than the decimal itself: it arrives after the Federal Reserve held the federal funds target at 3.50% to 3.75% for a fifth straight meeting in July, a decision that drew three dissents in favor of a 25 basis point hike. Two consecutive tame monthly readings suggest the energy-driven burst earlier in the year is fading rather than broadening into services and shelter.

The composition is what the hawkish wing of the committee will argue over. A 0.1% headline gain alongside a 0.2% core gain means the deceleration is being carried by energy, and energy is the least durable component in the basket given continuing supply uncertainty tied to the Middle East. Strip that support away and the underlying trend is closer to flat than falling.

What to watch: whether core continues to grind toward the Fed's 2% objective in the August report, the path of gasoline and utility prices into the autumn, and the September FOMC decision, where traders still assign a non-trivial probability to a hike rather than a hold. A second in-line month would take the tail risk of tightening off the table; an energy rebound would put it back.