US inflation moderated slightly in July 2026, offering some relief to financial markets while leaving the Federal Reserve’s next interest-rate decision finely balanced.
The Consumer Price Index rose 3.4% over the 12 months to July, easing from 3.5% in June and matching market expectations. On a monthly basis, consumer prices increased by 0.1%, following a 0.4% decline in June, according to the US Bureau of Labor Statistics.
Energy prices were a major influence on the headline reading. The energy index declined by 1.5% month-on-month, helped by a 2.9% fall in gasoline prices. However, energy costs remained elevated on an annual basis, rising 14.7% amid ongoing oil-market disruption linked to the Iran conflict and uncertainty surrounding the Strait of Hormuz.
Underlying inflation also showed signs of moderation. Core CPI, which excludes volatile food and energy prices, increased by 0.2% over the month and 2.5% year-on-year, with both figures in line with market forecasts. Lower drug prices partly offset increases in categories such as video and audio equipment.
Federal Reserve Still Faces a Difficult Decision
The inflation report is unlikely to settle the debate over the Federal Reserve’s September policy decision. Although inflation remains above the central bank’s 2% target, weaker July labour-market data may reduce the urgency for another increase in borrowing costs.
Interest-rate futures indicated that investors remained divided following the CPI release. At the time cited in the original report, the CME FedWatch Tool implied an approximately 59.9% probability that rates would remain unchanged in September and a 40.1% chance of a 25-basis-point increase. These probabilities are market-based estimates and can change rapidly.
Fed Rate Outlook (Source: CME FedWatch Tool)
Attention will now turn to US producer-price data and the Personal Consumption Expenditures price index, the Federal Reserve’s preferred inflation measure. Softer readings could strengthen the case for keeping rates steady, while renewed energy inflation could increase pressure on policymakers to act.
What It Means for Australian Investors
The US rate outlook remains important for Australian markets because it can influence global bond yields, the US dollar, commodity prices and investor appetite for risk. A less aggressive Federal Reserve stance could support ASX-listed technology and other growth-oriented companies by easing pressure on valuations.
However, uncertainty surrounding global energy supplies may continue to generate volatility. Elevated oil prices could support Australian energy producers while increasing inflationary pressure and costs across transport, manufacturing and consumer-facing industries.
For Australian investors, upcoming US inflation indicators, labour-market data and developments in the Middle East are likely to remain important near-term market drivers.
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