US Inflation Slows to 3.4% in July, but September Fed Decision Hangs in the Balance

US Inflation Cools to 3.4% as the Fed Faces a Split Decision

US consumer price growth slowed for a second consecutive month in July, but the slowdown matched forecasts and did not settle the Federal Reserve's next decision. The Bureau of Labor Statistics reported a 0.1% monthly increase in consumer prices, leaving the annual rate at 3.4 percent—down from 3.5 percent in June and well below May's 4.2 percent. Core prices, which exclude food and energy, rose 0.2 percent and dipped to 2.5 percent annually from 2.6 percent. The figures matched Dow Jones consensus expectations.

The annual improvement is partly the arithmetic of a strong summer in 2025; monthly momentum actually firmed after June's weak readings. Equity futures rose after the release, and traders trimmed bets on tighter monetary policy: the CME FedWatch probability of a September rate increase fell from 48 percent to 42 percent.

The central bank enters that decision divided. On 29 July it left its policy rate in a 3.50-to-3.75 percent range for a fifth straight pause, while three regional Fed presidents dissented in favour of a quarter-point increase—the largest same-direction dissent bloc in nearly a decade. Chair Kevin Warsh has abolished forward guidance and says the Fed will “guarantee price stability”; Cleveland's Beth Hammack argues several increases may be needed, while New York's John Williams expects inflation to ease in the second half of the year.

The other side of the mandate is weaker. The economy shed 23,000 jobs in July against expectations of roughly 83,000 new positions, average hourly earnings rose 3.2 percent on the year, and unemployment sits at 4.1 percent. Oil is the main upside inflation threat: the Strait of Hormuz remains largely closed, Brent has risen about 5 percent since Friday and is roughly 25 percent above early-July lows. Thursday brings producer prices, followed by retail sales and confidence data on Friday, with another labour-market and inflation reading due before September's meeting.

Inside the Fed Divide and the Hormuz Oil Threat

The July inflation report is best read as a snapshot that confirms disinflation has slowed rather than decisively resumed.

Why the annual slowdown is less reassuring than it looks

The fall from 3.5 percent to 3.4 percent annual CPI rests heavily on comparison with the strong summer of 2025. On a month-on-month basis, headline prices actually rose 0.1 percent after a 0.4 percent decline in June, meaning the new data point is firmer than the previous reading. That helps explain why traders lifted stock futures but only trimmed the probability of a September hike from 48 percent to 42 percent.

The Fed is now visibly split

The committee's 29 July decision to hold rates at 3.50-to-3.75 percent was its fifth consecutive pause, but three regional Fed presidents dissented in favour of a quarter-point hike. Cleveland President Beth Hammack argues one increase may do little and that several might be needed, while New York President John Williams expects inflation to decline in the second half. Chair Kevin Warsh has removed forward guidance, so the public is left reading votes and data rather than a clear policy path.

The labour market is pushing against the price mandate

July payrolls fell by 23,000 jobs compared with expectations of about 83,000 new positions. Average hourly earnings are up 3.2 percent annually, below the 3.4 percent inflation rate, and unemployment is 4.1 percent. That combination is why stagflation fears have re-emerged and why a rate choice that appears obvious for prices is not obvious for the economy.

Hormuz remains the inflation risk that can override both

The Strait of Hormuz is still largely closed, with transits reduced to 6-to-11 ships per day from 130-to-140 before the war. Compensation talks are blocked, Brent is about 25 percent above early-July lows, and Goldman Sachs estimates fuel pass-through lifted US airfares 2 percent last month. A durable oil premium would feed back into both headline and core goods inflation just as the Fed weighs another move.

The next data points will move the probability again

Thursday's producer-price report and Friday's retail sales and confidence figures are the immediate catalysts. A further labour-market report and another inflation reading also arrive before the September meeting. Given that the implied hike probability has already swung from 67 percent a week ago to 48 percent before Wednesday's CPI and then to 42 percent, the decision remains closer to a coin flip than to a settled case.

What Businesses and Investors Should Watch Before September

The macro picture leaves business and investment decisions tied to a handful of concrete data points and price signals.

• Treat Thursday's producer-price report and Friday's retail sales and confidence figures as the next probability movers. They land before the September Fed meeting, and the CME FedWatch reading has already swung from 67 percent a week ago to 48 percent before Wednesday's CPI, then to 42 percent after it.
• Stress-test energy-exposed budgets around a persistent oil premium. Brent is up roughly 5 percent since Friday and about 25 percent above early-July lows, with Hormuz transit running at 6-to-11 ships per day versus 130-to-140 before the war.
• Watch airfare and freight cost pass-through. Goldman Sachs estimates US airfares rose 2 percent last month as jet fuel costs fed into ticket prices, a direct margin signal for travel and logistics buyers.
• Do not assume a soft landing from the July CPI alone. The economy lost 23,000 jobs in July against expectations of roughly 83,000 new positions, and average hourly earnings rose 3.2 percent year-on-year, below the 3.4 percent inflation rate.
• Price the Fed's internal split into financing scenarios. Three regional presidents dissented for a hike on 29 July—the largest same-direction bloc in nearly a decade—so the difference between one and several quarter-point moves materially changes debt service costs.