US Inflation Cooling on Paper Masks Broader Economic Price Pressures

The US inflation rate appears to be cooling off on paper, but beneath that surface-level improvement lies a more uncomfortable story. After peaking at 4.2 percent in May, trailing 12-month inflation fell to 3.5 percent in June and 3.4 percent in July.

However, core inflation measures that strip out volatile food and energy costs are barely budging, signaling that the price pressures unleashed over the past year have migrated from the gas pump into the broader economy.

The current inflationary episode did not begin with ordinary demand swings. Its roots lie in a combination of sweeping US tariffs and the supply shock triggered by the Iran war. The Iran conflict effectively shut the Strait of Hormuz to virtually all maritime traffic, halting the flow of roughly a fifth of the world's petroleum liquids.

The relief has been uneven, with fuel prices remaining elevated by historical standards. A New Jersey gas station that had not charged more than $3 per gallon before the war's outbreak in late February was recently posting $3.87. The national average still sits uncomfortably close to $4.