July inflation report to provide crucial signs of where prices are
headed
[August 12, 2026] By
CHRISTOPHER RUGABER
WASHINGTON (AP) — Is U.S. inflation stuck at a stubbornly high level or
is it steadily cooling?
The government's latest report on consumer prices, to be released
Wednesday, should provide some hints. It will be closely watched by the
inflation-fighters at the Federal Reserve as well as Republicans facing
tough midterm elections, not to mention consumers still struggling with
high grocery prices.
Americans have grappled with worsening inflation since early last year,
after tariffs lifted the cost of imported goods. Then this spring, the
Iran war raised oil and gas costs, pushing inflation to its highest
level in three years. The AI buildout has also increased prices for
computer chips and electronic equipment. All three trends could end up
having only temporary effects and if they fade, inflation could drop
back to the Federal Reserve's 2% target.
Wednesday’s inflation report is expected to show that consumer prices
rose 3.4% in July from a year earlier, according to a survey of
economists by data provider FactSet. That would be down from 3.5% in
June and lower than the recent peak of 4.2% in May.
On a monthly basis, prices are expected to have risen just 0.1% from
June to July, after they fell in June on sharply lower gas costs.
Excluding the volatile food and energy categories, core inflation may
cool for a second month, to 2.5%, down from 2.6% in June, according to
FactSet. Core prices — which the Fed pays particularly close attention
to — likely rose 0.2% from June to July.
A big reason inflation has cooled in the past couple of months is that
gas prices fell after a cease-fire was reached in the U.S.-Iran war.
Average gas prices were lower last month than in June, so that should
reduce last month’s inflation reading. But gas prices rose again in late
July and earlier this month, meaning inflation could pick up again when
August’s figures are released next month, adding a layer of uncertainty.
On Tuesday, gas averaged $4.01 a gallon nationwide, 13 cents higher than
a month ago.
Overall, price increases have stayed above the Fed's 2% target for more
than five years, suggesting that more than temporary factors may be at
work. The cost of services such as healthcare, restaurant meals, and car
maintenance are on average rising at more than 3% annually, and they
aren't particularly sensitive to gas prices or AI investment.
Rising costs for services often reflect higher wages, as companies
charge more to offset the cost of higher pay. But incomes aren't growing
fast enough to sustain inflation, economists note.
It's a confounding situation that has left many economists — and Fed
officials — seeking more information to determine where inflation is
headed.
“You've got all these things that are just not the way the economy used
to behave,” Diane Swonk, chief economist at KPMG, said.
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Gas prices are displayed electronically at QT gasoline station,
Thursday, Aug. 6, 2026, in Greenwood Village, Colo. (AP Photo/David
Zalubowski)
 For many consumers, years of sharply
rising grocery prices have led them to adopt a wide range of coping
strategies, from comparison shopping, to couponing, to cutting back
on favorite foods.
Some retailers, such as Walmart, have responded by rolling back food
prices, a trend that could have lowered July's inflation figures.
Yet many other firms are still passing on higher costs.
Paint company Sherwin-Williams is planning an 8% price increase
effective Sept. 1 to offset higher raw material costs, CEO Heidi
Petz told analysts late last month. She said that because of the
company’s strong relationships with suppliers, it was able to delay
price increases until now.
“We are seeing the impact of higher oil and related cost pressures,
and we expect continued volatility throughout the balance of the
year,” she said.
Wednesday's report comes as the Federal Reserve is sharply divided
over whether it should hike its key interest rate to combat
inflation. The Fed kept its rate unchanged, at about 3.6%, at a
meeting late last month. But the vote was 9-3, with three dissenters
favoring a rate hike.
And at a July 29 news conference explaining the decision, chair
Kevin Warsh was vague about the Fed's next steps, in keeping with
his focus on reining in the central bank's previous willingness to
signal whether it was prepared to raise or cut borrowing costs.
“If inflation continues to be elevated ... interest rates could well
be part of that solution," he said. “But I wouldn't say it's in
isolation.”
Long-term interest rates rose after Warsh's comments, suggesting
investors worried that inflation could worsen in the coming months
and the Fed might not lift borrowing costs to fight rising prices.
Complicating matters, the government said last week that employers
had cut jobs in July, a sign of potential economic weakness. The Fed
typically avoids rate hikes when hiring is faltering, because higher
borrowing costs could slow the economy further.
Investors now see the odds of a rate hike at the Fed's next meeting
in September as roughly 50-50, according to CME Fedwatch.
___
AP Writer Anne D'Innocenzio contributed to this report from New
York.
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