Inflation moderated for the second month in a row as the headline Consumer Price Index eased to 3.4% year-over-year. This marks a slight decrease from June's 3.5% reading, and was in line with economist estimates. On a monthly basis, consumer prices rose 0.1%, also matching estimates. The decline was partially driven by a further fall in energy prices (-1.5%) following a steep drop in June.
On a "core basis," which excludes volatile food and energy prices, prices rose 2.5% year-over-year and rose 0.2% month-over-month. Both readings were also right in line with forecasts.
Key Takeaways
- Headline inflation eased to 3.4% year-over-year while core inflation fell to 2.5% in July.
- Headline prices rose 0.1% from May, driven by a 1.5% drop in energy prices.
- Current market expectations show a 62% chance of a hold at the next Fed meeting versus a 38% chance of a 25 basis point hike.
Here is the introduction from the BLS summary, which leads with the seasonally adjusted monthly data:
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent on a seasonally adjusted basis in July after falling 0.4 percent in June, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.4 percent before seasonal adjustment.
The index for shelter rose 0.1 percent in July, accounting for roughly two-thirds of the monthly all items increase. The index for food also increased 0.1 percent over the month, as the index for food away from home increased 0.3 percent. In contrast, the energy index declined 1.5 percent in July.
The index for all items less food and energy rose 0.2 percent after being unchanged in June. Indexes that increased over the month include medical care, airline fares, communication, education, and recreation. Conversely, the index for motor vehicle insurance was among the major indexes that decreased in July.
The all items index rose 3.4 percent for the 12 months ending July after rising 3.5 percent for the 12 months ending June. The all items less food and energy index rose 2.5 percent over the year, following a 2.6-percent increase over the 12 months ending June. The energy index increased 14.7 percent for the 12 months ending July. The food index increased 3.0 percent over the last year.
The first chart is an overlay of headline CPI and core CPI since the turn of the century. The highlighted two percent level is the Federal Reserve's target inflation rate. In July, headline prices eased from 3.53% in June to 3.36%. Meanwhile, core price pressures cooled from 2.59% in June to 2.48%.
The next chart shows both series since 1957, the year the government first began tracking core inflation.
Consumer Price Index Components
The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each, which is shown in the chart below. The BLS weighs these annually with the latest weighting taking place in December 2025.
The following table shows the annualized change in Headline and Core CPI (not seasonally adjusted) for each of the past six months. It includes the eight primary components and a separate entry for Energy, a collection of sub-indexes within Housing and Transportation. These breakdowns help illustrate how inflation impacts personal expenses based on individual exposure. For instance, the current volatility in energy and gasoline is clearly reflected in the Transportation component.
Here is the same table as above with month-over-month numbers (not seasonally adjusted).
Note: For additional information on the component composition of the Consumer Price Index, see our Inside the Consumer Price Index.
Inflation: Fed's 2% Target
The Fed is on record as having a target rate of 2% for core inflation. While the Fed traditionally uses the PCE Price Index as their preferred inflation gauge, the Consumer Price Index remains the most widely recognized measure. You can read our full analysis on how these two inflationary measures compare.
The Federal Reserve concluded its fifth meeting of the year by maintaining the federal funds rate at 3.50%–3.75%. The decision, which markets had largely priced in, keeps the benchmark rate at its lowest level since November 2022 for the fifth meeting in a row.
In a statement nearly identical to that of the prior meeting, the Committee noted, "Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy." They stated that they will "deliver price stability."
The Fed will meet again in September where they are expected to hold rates steady. At the time of writing, the CMEFedWatch Tool shows a 62% likelihood the Fed will hold rates where they are versus a 38% likelihood of a 25 basis point hike.
