Dive Brief:

• The consumer price index excluding volatile food and energy prices rose 2.5% during the 12 months ending in July after a 2.6% gain in June, affirming a Federal Reserve decision late last month to keep borrowing costs steady.
• Inflation including all items increased 3.4% on an annual basis after rising 3.5% in June as energy prices last month fell 1.5%, the Bureau of Labor Statistics said Wednesday. This month the price of gasoline and other energy commodities have increased amid a flare-up in the U.S.-Iran conflict. 
• Inflation — exceeding the Fed’s 2% goal for more than five years — is “still too high but the direction is good,” LPL Financial Chief Economist Jeffrey Roach said in a note. “Our baseline is the Fed holds rates steady, but an increasing number of voting members are hawkish and could convince the majority to implement a hike,” he said.

Dive Insight:

A war-induced surge in energy prices during the past year is the sharpest spur keeping inflation above the central bank’s target.

Energy commodity prices rose 24.7% during the year ending in July, the BLS said. During the past month, the price of a gallon of gasoline increased to $4.04 from $3.88, according to AAA.

Price pressures have also persisted because of a renewal of tariffs by President Donald Trump and surging demand for construction and technology equipment essential for building the foundation for artificial intelligence.

Toward the end of 2026 “we should expect inflation to decelerate to 2.7% as transportation costs and health care costs ease,” Roach said.

“We expect the debate at the September FOMC meeting to be lively as the economy experiences a tight labor market while the inflation picture is quite blurry,” he said, referring to a scheduled Sept. 15-16 meeting of the Federal Open Market Committee.

Following release of the inflation report, traders in interest rate futures trimmed the odds that policymakers will cut the federal funds rate this year to 21.2% from 25.4% on Tuesday, according to CME Group’s FedWatch tool.

The federal funds rate is currently set at range between 3.5% and 3.75%. Three Fed policymakers at the July 28-29 FOMC meeting last month dissented against a decision to hold the main interest rate steady, favoring a quarter-point increase.

“If you follow the FOMC conversations at all, there has been this look-through strategy that we’ll look through tariffs and we look through oil prices,” San Francisco Fed President Mary Daly said in a speech last week. “And the AI remains an open question because it’s very early days in terms of how that’s affecting broader inflation.”

“The question is, are these three shocks — they’re having this overlapping effect — but are they going to have a compounding effect?” according to Daly, who last month supported not changing the benchmark rate.

“Is the fact that they’re overlapping — and overlapping at a point in time where inflation’s already elevated — will that serve to compound the effects?” she said. “That’s the question” that will influence future monetary policy.