A decline in gasoline prices helped push US inflation down slightly to 3.4% in July, even as the ripple effects of Trump's confrontation with Iran continue to impact the broader American economy.

The Bureau of Labor Statistics released the Consumer Price Index (CPI) data on Wednesday, showing an annual increase that was below June's 3.5% figure and aligned with the consensus forecast from Bloomberg's survey of economists. Core inflation, which excludes volatile food and energy costs, eased to 2.5% from 2.6%. The primary driver behind this cooling of inflation was a further drop in energy prices. Although US-Iran geopolitical tensions in late July pushed up retail gasoline prices, the monthly average for gasoline still fell by 2.9% compared to June.

This data arrives amid growing calls for the Federal Reserve to raise interest rates. The US-Iran conflict has previously disrupted energy supplies, generating new inflationary pressures. Combined with tariff policies and price increases linked to the AI industry expansion, inflation had been on a persistent upward trend. In May, US CPI hit a three-year high, touching 4.2% year-over-year. Market participants are concerned that the Fed may struggle to contain rising inflation. At their July policy meeting, Fed officials opted to hold interest rates steady, a decision followed by a significant surge in long-term Treasury yields.

In an interview this week, Boston Fed President Susan Collins noted that many Americans are finding it difficult to make ends meet and suggested the Fed might raise rates in September. Following Wednesday's inflation data release, market reaction was muted: the dollar weakened and US stock futures edged higher, but expectations for the Fed's rate path remained largely unchanged. Treasury yields saw a slight uptick but were still on a downward trajectory overall for the day.