US Inflation Eases to 3.4% as Fed Weighs Rate Hikes

The Bureau of Labor Statistics reported that U.S. annual inflation cooled to 3.4% in July, down from 3.5% in June. The Consumer Price Index rose 0.1% month-over-month, while core inflation—which excludes volatile food and energy costs—slipped to 2.5% annually, the slowest pace since March 2021. These figures aligned with market expectations and suggest a moderation of price spikes seen earlier in the year.

Despite the cooldown, inflation remains significantly above the Federal Reserve's 2% target. Price pressures were driven by a 14.7% annual surge in energy costs and rising airline fares, both heavily influenced by the ongoing war with Iran. Conversely, declines in gasoline and grocery prices provided a cushion. Other contributing factors included tariffs and increased semiconductor costs linked to artificial intelligence infrastructure.

The Federal Reserve remains sharply divided on how to respond. Some officials, including Cleveland Fed President Beth Hammack, argue that persistent inflation justifies rate hikes. Others point to a fragile labor market, which saw a loss of 23,000 jobs in July, as a reason to hold rates steady. Federal Reserve Chair Kevin Warsh has maintained a commitment to price stability but has avoided providing explicit forward guidance, increasing market reliance on raw data.

Following the report, market probabilities for a September interest rate hike declined, with some indicators shifting the likelihood to approximately 38% to 43%. Investors are now looking toward the upcoming Jackson Hole Economic Policy Symposium for further clarity on the central bank's strategy.