July CPI cools, but not enough to derail hawks

August 12, 2026

The consumer price index (CPI) index rose 0.1% in July, after dropping 0.4% in June. That puts the overall price index 3.4% above the level a year ago and a tick slower than the 3.5% gain we saw in June. The gain overshadowed the increase in wages during the month, which further eroded purchasing power. The relief could be short-lived given the rebound in oil prices during July and into August. 

A drop in gasoline prices at the beginning of July more than offset an increase later in the month; prices at the gas pump receded 2.9%. The 180-degree move in oil prices with tensions reignited in the Middle East is still ahead of us. Prices at the gas pump are still up nearly 25% from a year ago. Brace for more increases in August. 

Worse yet, diesel fuel, which feeds into just about all other goods accelerated much more rapidly during the month due to constraints on refining capacity. That could cause a more broad-based increase in inflation in August. 

The reopening of the Strait of Hormuz remains tenuous. The US Energy Information Association has lowered its forecast for global oil demand amidst higher prices. China played a key role in alleviating the upward pressure on prices by cutting imports, drawing upon its inventories and pivoting to coal and renewables. However, inventories are finite and will eventually have to be restocked. US inventories have plummeted to more than a four-decade low, which opens the door to price spikes. 

Electricity prices were the outlier and edged up 0.1% last month on a blistering heat wave and the ongoing stress data centers are placing on the local energy grids. Wages in the utility sector jumped 8.1% from a year ago in July, the highest on record. The data date back to the shale boom in 2015. July was a record month for heat across the US, which increased air conditioner usage; previous utility records were hit in 1932 and 2012.

Food prices saw some relief, with a slight drop in prices at the grocery store offset by continued increases in the cost of food away from home. Big-box discounters and some grocery chains leaned harder into promotions to preserve the business of low- and middle-income households. Spending on food at home has dropped in response to the cumulative effects of inflation, cuts to SNAP funding and a sharp increase in GLP-1 drugs. We have literally lost our appetite for just about everything, including alcohol.

Core CPI, which strips out food and energy costs, rose 0.2% in July, after moving sideways in June. That translated to a 2.5% increase from a year ago, which is a bit cooler than the 2.6% pace of June. 

Shelter costs are one of the largest moderating factors. Concessions in some of the most overbuilt markets in the South are tempering gains in major metro areas in the Midwest and Northeast. The data showed some additional firming of rents, with fewer concessions in July. San Francisco has become a new hot spot due to tech IPOs. Data by Zillow showed that absorption of apartments remains strong in overbuilt markets, while supply of new space has abated. 

It takes a while for leases to reset and the full effects to show up; we will not see major increases until 2027. The Federal Reserve missed the effects of that lag as we emerged from the pandemic. The Fed does not like to make the same mistake twice. That does not prevent it making new mistakes. 

Another issue is homeowners' association costs, which have skyrocketed. Those costs show up less in the CPI but are better captured by the personal consumption expenditure (PCE) index, which the Fed targets. The cost of repairs and grounds keeping has soared. 

The end of the FIFA World Cup games kept hotel rooms and short-term rentals in check. Travel and tourism increases were less than expected, while those out on vacations in July were the second lowest number on record; only July 2020 was worse. 

Travel and tourism from abroad picked up but was limited to host cities. The turnout was less than hoped. The largest wins of the games were ranch dressing and beer sales. Boston ran out of beer early in the games with a surge in Scottish tourists. Spain gets a nod for cinching the one point scored in the final game to ensure victory.

Durable goods prices rose, but gains were uneven. New vehicle prices were essentially flat as automakers continued to absorb higher costs, while used vehicle prices picked up. Motor vehicle parts continued their upward march. Appliances and consumer electronics accelerated, while furniture costs fell. 

Computer prices jumped 3.5% while smart phones jumped 1.1%, the largest gains on record. Internet services jumped as well. That reflects the high costs of memory chips, which continue to climb. The administration has enacted a new round of tariffs on inputs into chips produced in the US. That could spill over into lower cost chips that go into vehicles and appliances. 

Services still too hot & sticky

The super core services, which strip out shelter costs, rose 0.2% after dropping the same amount in June. That is not alarming nor reassuring. Those costs rose 3.0% from a year ago, close to 3.1% in June. The dispersion of gains was broader in services. That is a problem for hawks at the Fed, who are worried about services inflation, which looks sticky. 

The cost of airfares continued to soar – up 25.6% from a year ago. High jet fuel costs and the failure of one of the largest low-cost carriers have boosted prices. The component for airfares that feeds into the PCE index will come out tomorrow with the producer price index. 

Medical costs continued their upward march in response to aging demographics. Gains were broad-based, except for nursing homes and in-home care. A drop in Medicaid coverage across many states has curbed the ability of elder care providers to bid up wages to replace workers lost to curbs on immigration. More than 100,000 Haitian healthcare workers were lost at the end of July due to a lapse in their Temporary Protected Status. 

Separately, reductions in Medicaid and a loss in subsidies for the Affordable Care Act have shrunk the ranks of the insured. That means more costly emergency room visits, which the insured bear the costs of. We will hit another cliff in Medicaid in 2027, which will dramatically curb access to medical care and intensify rationing, notably in rural areas where healthcare deserts are common.

The real break has been in vehicle insurance, which is falling in price. Tort reform has limited payouts across many states. The problem is the rise in the cost of motor vehicle parts and maintenance, which continue to climb. Insurance rates are likely to rise as we move into next year.