Inflation Cools, Consumer Spending Slows Amid Iran War Fallout

US inflation cooled in July, but consumer spending slowed significantly as well. According to the Labor Department, US inflation rose 3.4% in July from a year ago, down slightly from 3.5% in June. However, inflation is still higher than before the Iran war began in February, when it was 2.4%. On a monthly basis, prices rose just 0.1% from June to July.

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%, but the vote was 9-3, with three dissenters favoring a rate hike. Americans unexpectedly cut their spending in July as a boost from government tax refunds faded.

Retail sales slipped 0.6% last month, the biggest drop since May 2025, from a revised gain of 0.2% in June. Excluding sales at gas stations and auto dealers, retail sales in July fell 0.2%. The US unemployment rate is low at 4.1%, but existing home sales fell 1.7% last month from June to a seasonally adjusted annual rate of 4.06 million units.