KVIG Informative

Inflation cooled slightly last month, but Americans’ paychecks are still losing ground to it, and a weakening job market is giving the Federal Reserve one more reason to hold off on raising interest rates.

The Consumer Price Index rose 0.1% in July and 3.4% over the past year, down slightly from June’s 3.5% annual rate, the Bureau of Labor Statistics reported Wednesday. Core inflation, which excludes food and energy, rose 0.2% for the month and 2.5% over the year, in line with forecasts.

Wages have not kept pace. Annual wage growth stood at 3.2% in July, meaning inflation outpaced pay for the month — a gap economists describe as the central affordability problem for middle- and lower-income households right now.

Energy prices offered some relief, falling 5.7% over the month as gasoline dropped 9.7%, more than offsetting a 0.1% rise in shelter costs and a 0.2% rise in food prices. Egg prices fell more than 25% year-over-year as the market continued recovering from a bird flu-driven shortage.

The inflation report followed a weaker-than-expected jobs report last week. Employers cut 23,000 jobs in July, a reversal from the 57,000 jobs added in June, and more than a quarter million people left the labor force. The unemployment rate ticked down to 4.1% from 4.2%, largely because of that shrinking labor force rather than stronger hiring.

The Federal Reserve held interest rates steady at its July meeting on a 9-3 vote, with all three dissenters pushing for a rate increase. Cleveland Fed President Beth Hammack, one of the dissenters, said this week that delaying further would make returning inflation to the Fed’s 2% target harder and more expensive to achieve.

A 50% U.S. tariff on roughly $20 billion of Canadian goods took effect Wednesday, covering products that otherwise comply with the continental trade agreement between the U.S., Canada and Mexico. The tariff lands even as Canada’s own labor market strengthened, adding 75,100 jobs in July and pushing its unemployment rate down to 6.4%, its lowest level since 2024.

Markets are now pricing in a Fed that stays on hold through its September meeting, but one more inflation report is due before policymakers meet again — and the growing gap between what people earn and what they pay at the register isn’t waiting on the calendar to close itself.