Inflation slows but prices remain elevated as Iran war and spending on
AI push up prices
[August 13, 2026] By
CHRISTOPHER RUGABER
WASHINGTON (AP) — U.S. inflation declined slightly last month as the
cost of gas and groceries slipped, though prices are still rising more
quickly than before the Iran war, posing challenges for the White House
as the midterm elections near.
Consumer prices increased 3.4% in July from a year ago, down slightly
from 3.5% in June, the Labor Department said Wednesday. Inflation had
fallen to 2.4% before the Iran war. On a monthly basis, prices rose just
0.1% from June to July.
The mild decrease is the second straight decline after sharply higher
gas prices pushed inflation to 4.2% in May, a three-year high. Yet even
with the pause, prices are still rising more quickly than average wages,
underscoring the struggle many Americans have had paying for groceries,
gas, and healthcare. And many costs grew last month, including airfares,
computers, and used cars.
Excluding the volatile food and energy categories, core inflation
slipped to 2.5% in July from a year ago, down from 2.6% in June. July’s
figure matches a post-pandemic low reached in January and February,
before the Iran war.
Core prices rose 0.2% from June to July. Monthly increases at about 0.2%
would be low enough over time to bring inflation closer to the Fed’s 2%
goal.
“America still has an inflation problem, but there are encouraging signs
that price pressures outside of the gas pump are easing,” Heather Long,
chief economist at Navy Federal Credit Union, said.
Inflation report could make Fed rate hike less likely
Cooler inflation could also ease pressure on the Federal Reserve to
raise their key interest rate to combat rising costs. Fed officials are
sharply split over their next steps. Roughly half the members of the
central bank's rate-setting committee support raising borrowing costs
this year, while another half think rates are already high enough to
slowly push inflation back to their 2% target.
“We're clearly not out of the woods, however it makes the Fed’s decision
a little bit easier, because now you see that inflation is creeping
down,” said Dan North, senior economist at Allianz Trade North America.
Still, oil prices remain elevated and gas prices rose in late July and
August, suggesting overall inflation could accelerate next month. On
Wednesday, gas averaged $4.04 a gallon nationwide, 16 cents higher than
a month ago, according to the motor club AAA.
Inflation has been pushed higher by a series of shocks to the economy,
including President Donald Trump’s tariffs imposed last spring, higher
gas prices stemming from the U.S attack on Iran, and a surge in
investment in artificial intelligence infrastructure that has boosted
computer chip prices. The key question for the inflation-fighters at the
Federal Reserve — not to mention for consumers struggling with high gas
and grocery prices — is how quickly those one-time effects will fade or
whether they will lead to persistently rising prices.
Some companies, however, are still struggling with higher costs from
Trump's tariffs.
Julie Robbins, CEO of Earthquaker Devices, an Akron, Ohio-based maker of
pedals used to create effects for guitars, said her company has paid
$200,000 in tariffs this year and has had to raise prices twice to
offset the costs.
Only a small amount of those tariffs have been refunded after the
Supreme Court struck down Trump's emergency duties. Robbins is worried
they will have to raise prices again as the White House has sought to
impose new tariffs to replace the ones that lost due to the Supreme
Court decision.
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A person loads groceries in plastic bags into their vehicle, May 18,
2026, at a grocery store in Cincinnati. (AP Photo/Joshua A. Bickel,
File)
 Her company's electric bills have
also risen in recent months and the rising costs of fuel have pushed
up her shipping costs.
“I am just seeing more and more costs going up all the time,”
Robbins said. “The money we paid on tariffs, that easily could have
paid for two or three more employees.”
Gas, grocery prices fell, while computers, airfares rose
Wednesday's report showed that gasoline prices fell 2.9% from June
to July, and even grocery prices declined slightly, falling by 0.1%.
Yet gas prices are 25% higher than a year ago. And groceries are
2.7% more expensive than a year earlier.
Hotel room prices dropped 2.8% from June to July, likely reflecting
the end of the World Cup tournament. Clothing costs rose just 0.1%,
though they are up 3.9% in the past year.
Other things are growing more expensive: Computer prices jumped 3.5%
from June to July, reflecting a decision by Apple to sharply raise
prices for its computers and tablets as AI spending pushes up the
cost of semiconductors. Smartphone prices rose 1.1%.
Airline fares rose 2.2% from June to July as jet fuel prices spiral
higher along with oil.
Price increases have stayed above the Fed's 2% target for more than
five years, suggesting there is more than temporary factors at play.
The cost of services such as healthcare, restaurant meals, and car
maintenance rose 3% in July from a year earlier, 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.
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.
Retailers, including Walmart, have responded by rolling back food
prices, a trend that could have lowered July's inflation figures.
Yet many other businesses are still passing on higher costs.
Paint company Sherwin-Williams is planning an 8% price increase in
September to offset higher raw material costs, CEO Heidi Petz said
late last month.
“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.
___
AP Writer Anne D'Innocenzio contributed to this report from New
York.
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