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.

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