Truflation: US Monthly Inflation Report - July 2026

PDF Version: https://asset.cloudinary.com/djy27wpqd/9b12fc54c9554c0c6f2f0f771d05d51a

Economic Growth and Consumer Activity

The Bureau of Economic Analysis (BEA) released its advance estimate for second quarter GDP, showing the economy expanded at an annualized rate of 1.5%, down from 2.1% in the first quarter and below market expectations of 2.3%. While the headline figure points to a moderation in economic growth, the underlying details suggest the economy remains more resilient than the top line number implies.

The weaker headline was driven by a sharp increase in imports, particularly capital goods, semiconductors and AI-related equipment, all subtracted meaningfully from GDP, while slower inventory accumulation also weighed on growth. Although these factors reduced headline GDP, they largely reflect continued domestic demand and business investment rather than a deterioration in economic fundamentals.

Exhibit 1 – U.S. GDP Growth and Contributions by Component vs proceeding period

Source: Bureau of Economic Analysis

The standout feature is the resilience of consumer spending, which remained firm through June, although the pace of growth moderated from May. Total retail sales increased 0.2% MoM to $768.6 billion. Sales were 6.7% higher YoY, pointing to continued strength in nominal consumer demand despite elevated interest rates and cost of living pressures.

The headline retail sales figure underscores some of the underlying strength because gasoline station sales fell 5.3% MoM. Excluding gasoline, retail sales increased 0.7% MoM. There was considerable divergence across categories. Non store retailers rose 1.9% MoM and 14.2% YoY, continuing the structural shift toward online spending. Sporting goods, hobby, and book stores increased 1.3%, while electronics and appliances rose 0.8%. Weakness was concentrated in gasoline stations, health and personal care and clothing.

Personal saving rate stood at 2.7% in June, down from 2.9% in May. The saving rate is now well below its 30-year average of 5.7%. The broader trend has been one of steady decline, with the saving rate falling from 4.4% in January to 3.5% in March and 2.7% in June, leaving households with a significantly smaller savings cushion. This is also materially below the 4.6% saving rate recorded in June last year, suggesting households are continuing to prioritize consumption rather than rebuilding savings.

However, a saving rate of 2.7% leaves consumers with less financial buffer against higher prices. This becomes particularly important if wage growth slows or inflation remains elevated, as households have less scope to reduce saving further in order to support consumption.

Exhibit 2 – U.S. Savings Rate vs Retail Sales YoY Growth

Source: U.S. Census Bureau and the Bureau of Economic Analysis

The lower saving rate helps explain why consumer spending has remained surprisingly resilient despite restrictive monetary policy. But it also raises questions over the sustainability of that spending.

Truflation U.S. pay growth remains positive, but it has moderated considerably from the elevated rates seen in mid 2023. In July, TruPay-US increased 4.3% YoY and has remained relatively stable over the past 12 months, hovering between 4.0% and 4.4% YoY. Importantly, wage growth for job switchers accelerated to 6.1%, compared with 3.9% for individuals remaining in the same job, suggesting there is still a meaningful wage premium for changing employers.

The inflation backdrop complicates the picture. Nominal TruPay-US growth remains slightly above headline inflation with real purchasing power improving somewhat. However, the margin is narrow, meaning households remain sensitive to renewed price pressure in essentials such as food, utilities, insurance, and transportation.

The latest Nonfarm payroll report highlighted a weakening in the labor market, which unexpectedly fell by 23,000, compared with expectations for an 83,000 increase, while June was revised down to a 20,000 decline and May to just 63,000. These revisions reduced the 12-month average monthly job gain to only 34,000. This softening is also reflected in the Truflation Employment Index, which shows employment growth continuing to slow.

Exhibit 3 – BLS Nonfarm Payroll vs Truflation Nonfarm Payroll (3 Month Rolling)

Source: Truflation and the Bureau of Labor Statistics

The weakening in employment was relatively broad based. Government employment fell by 53,000, while retail, financial services and leisure and hospitality also lost jobs. Private payrolls rose by 30,000, with healthcare and construction each adding 22,000 jobs, although healthcare hiring was below its recent trend.

Unemployment rate dropped to 4.1%, but was largely driven by a decline in labor force participation. The labor force shrank by 264,000, pushing the participation rate down to 61.4%, its lowest level in more than five years. Household employment also fell by 87,000 while the employment to population ratio dropped to 58.9%, the lowest level since 2014.

The key concern for the Federal Reserve is that the economy is sending two different signals. Firstly inflation, price pressures remained materially above its 2% objective, while at the same time, the demand side of the economy is resilient. Consumer spending is the main reason for caution, as the low saving rate is effectively helping households maintain consumption despite higher prices and restrictive interest rates.

The case for an immediate hike is also not overwhelming. Pay growth is moderating, labor market conditions are cooling and some of the recent inflation pressure reflects supply side factors that higher interest rates cannot directly fix.

That leaves the Federal Reserve with a relatively attractive option: keep rates at 3.50%–3.75%, maintain restrictive policy and wait for more evidence. The important point is that with inflation already substantially above 2%, continued strong consumer spending is becoming bad news for the Fed. Softer wage growth gives policymakers some breathing room, but if strong retail spending, low household saving and robust private domestic demand persist, the Federal Reserve may ultimately have to conclude that its current policy rate is not restrictive enough.

Tariff Implications

There has been a significant escalation and restructuring of the tariff policy over the past couple of weeks, with several developments that matter directly for inflation. The biggest development is that the current administration has effectively rebuilt parts of its tariff regime after the Supreme Court struck down the broad IEEPA tariffs in February. 

A new 10%–12.5% global tariff regime has now arrived. On July 24, the administration imposed new tariffs of 10% or 12.5% on imports from 60 trading partners, including goods from the EU and China. The administration is using different statutory authority and has linked the duties to allegations that countries have failed to prevent the use of forced labor. These measures cover 99% of imports from the affected countries. In effect, the administration is replacing tariffs that faced legal challenges with more targeted tariffs based on alternative legal authorities.

Canada is also facing a major escalation. The administration announced tariffs of 50% on certain Canadian products, scheduled to take effect on August 19. These measures are being imposed under Section 338 of the Tariff Act rather than IEEPA. Canada is one of America’s largest suppliers of industrial inputs, so higher tariffs on Canadian goods have the potential to feed into U.S. manufacturing and construction costs rather than simply affecting imported consumer products.

The administration is also moving aggressively into semiconductors and solar. Earlier this week,  Trump announced new measures aimed at protecting the domestic polysilicon industry, a critical input for both solar panels and semiconductor manufacturing. The administration is moving toward a 15% tariff combined with minimum import prices, alongside broader actions designed to reduce U.S. dependence on China. This is potentially significant for the AI investment boom. Tariffs or minimum prices on semiconductor related inputs could raise the cost of expanding chip manufacturing, data centers and electricity infrastructure.

Legal challenges remain. A coalition of 25 U.S. states filed a lawsuit on August 3 challenging the new 10%–12.5% tariffs, arguing that the administration is once again exceeding presidential tariff authority. As a result, there is still considerable uncertainty over how much of the new tariff structure ultimately survives.

For now, the inflationary impact could become more persistent than markets initially assumed. Normally, tariffs would be treated as a one off increase in the price level. The problem now is that tariffs are being introduced repeatedly and across increasingly broad categories. This creates the risk of a longer transmission chain: until they are passed through to consumers which will affect inflation and in turn feed into wage demands and continued risks in a sustained services inflation.

Exhibit 4 – U.S. Customs Receipts and Effective Tariff Rate (Current Month Customs & Excise Duties as a % of previous months total import value)

Source: Department of Treasury

This comes at a particularly awkward time. Consumer demand remains relatively strong, retail sales are resilient, and the household saving rate is just 2.7%. Strong demand gives companies greater scope to pass tariff costs through to consumers rather than absorbing them through lower margins.

The balance of risks appears to be moving increasingly toward inflation rather than recession. More importantly, if tariff pass through begins appearing clearly in PPI, goods inflation, and services input costs over the next several months while consumer spending remains strong, pressure could build for a rate hike. The critical distinction is whether tariffs cause a one-time price level adjustment or produce second round inflation effects.

Inflation Forecast

The inflation picture is becoming more complicated rather than clearly improving. The June CPI report gave the appearance of a sharper cooling, but Truflation forecasts that U.S. BLS headline CPI will rise 0.2% MoM in July, while core CPI increased 0.1% MoM. If realized, this would see headline inflation rise from 3.5% to 3.6% YoY, while core inflation remains elevated at 2.5%.

Exhibit 5 — Truflation BLS CPI Predictions for July

The marginal increase in headline inflation is being driven primarily by continued increases in services while crude oil and gasoline prices remain elevated as the geopolitical risk remain embedded in markets. The most volatile components of the CPI basket are now driving much of the month to month volatility in inflation. Energy remains particularly important: gasoline prices are 23.2% higher YoY, while broader energy-related pressures remain materially above last year’s levels.

This makes June’s headline decline look somewhat deceptive and July’s data has reversed that trend with June increasingly appearing to have been a temporary inflation trough rather than the beginning of a sustained disinflationary move.

Input costs also suggest that underlying inflation pressure remains elevated with Producer Prices telling a more concerning story. While headline PPI fell 0.3% MoM in June, largely because of the decline in energy prices, it remained 5.5% higher YoY, with Core PPI (excluding food and energy) prices rose 0.1% MoM and remained 5.1% higher YoY.

Goods prices fell 1.4% MoM, primarily because energy prices declined 6.4%, including a 12.0% drop in gasoline. By contrast, core final demand goods prices increased 0.2%. Services prices also continued to rise, increasing 0.2% MoM and reaching 5.0% YoY, their strongest annual increase since February 2023. Beneath the energy driven headline decline, pipeline inflation remains uncomfortable.

Exhibit 6 — Truflation YoY Key Inflationary Metrics: Goods vs Services vs Core

The PMI data provides one of the clearest forward looking signals that inflation pressure is turning hotter. The ISM Manufacturing PMI jumped to 55.6 in July from 53.3, its strongest reading since May 2022. Production surged and new orders rose, but manufacturers continue to report substantial price pressure. The Prices Paid Index remained extremely elevated at 71.1, despite easing from 73.0 in June, with the increase in steel and aluminum prices being the key attributor combined with tariffs. The result is an uncomfortable combination: manufacturing activity is rising, orders are improving, production is accelerating and input prices remain elevated. That is not the disinflationary environment.

Services inflation looks even more problematic. The ISM Services PMI remained firmly expansionary at 54.1 in July, while business activity jumped and new orders accelerated, the Services Prices Index surged from 67.7 to 70.3. It has now been above 60 for 20 consecutive months, while its 12-month average has climbed to the highest level since April 2023. This matters because services represent the majority of the U.S. economy and tend to have more persistent inflation dynamics than goods. Strong services demand, accelerating business activity, rising new orders and higher prices together point to a stickier inflation backdrop.

Exhibit 7 – Contributors to Truflation YoY Headline Growth

During July, the largest downward contributions to inflation came from Transportation, Clothing, and Communications, while Food, Utilities, and Alcohol & Tobacco generated the strongest upward pressure. This mix reinforces the broader message: inflation is not accelerating uniformly, but the areas still generating pressure are either essential categories or sticky services linked components. That makes the inflation outlook less benign than the June headline suggested.

Sector-Specific Inflation Drivers

• Communications: -0.8% MoM | -1.6% YoY. Cellular service drove the decline, with low cost MVNOs, prepaid carriers and cable linked wireless bundles continuing to pull effective prices lower. The mechanism remains structural: 5G network maturity has lowered the per gigabyte cost of delivery, while resellers and challenger brands are competing through transparent pricing and annual plan discounts. With new competitive threats from satellite linked mobile service and continued MVNO promotion, communications should remain one of the more structurally disinflationary categories.

• Clothing & footwear: -0.7% MoM | +3.9% YoY. July’s decline was driven by promotions with retailers using 4th of July and end of season to clear summer inventory and pull forward price sensitive demand. The +3.9% annual figure shows earlier tariff and import cost pressures have not fully washed out of retail pricing. De minimis changes and continued tariff uncertainty are keeping replacement inventory expensive, even as current season goods are being discounted. The near term path is likely to remain choppy.

• Transport: -0.4% MoM | +3.9% YoY. July’s decline was driven by gasoline, with fuel prices falling -3.4% on the month as crude and refining pressures eased from the spring shock. The annual reading remains elevated because gasoline is still +23% YoY, while public and other transportation is up +17.4% as airlines continue to reprice around high jet fuel costs, capacity constraints and resilient travel demand. Unless energy prices continue to normalize, transportation inflation is likely to remain volatile, with gasoline providing near term relief while air and public transportation keep the annual figure elevated.

• Alcohol & tobacco: +0.6% MoM | +3.3% YoY. Alcoholic beverages drove the monthly increase as tariffs on imported wine and spirits continued to feed through to retail shelves and restaurant menus, even as total beverage alcohol volumes remained under pressure. Weak demand is limiting pricing power, but higher import, packaging, freight and on-premise operating costs are keeping retailers from fully discounting through the slowdown.

• Utilities: +1.0% MoM | +7.6% YoY. Natural gas was the monthly driver, rising +6.6% as July cooling demand increased gas fired power burn, despite healthy storage and strong production keeping wholesale prices contained. Electricity added only +0.3% on the month, but the +7.2% annual increase shows household bills are still being repriced around grid investment and the cost of integrating data centers. With summer heat, grid congestion, and utility cost recovery still in place, the sector is likely to remain upwardly biased even if wholesale natural gas avoids a sustained breakout.

• Food & non-alcoholic beverages: +1.3% MoM | +2.2% YoY. July’s increase was split between food at home and food away from home, with grocery prices lifted by fresh produce, sugar, non-alcoholic beverages and beef related supply pressure. Food away from home is also still being repriced around high labor, food, utilities and occupancy costs, keeping menu inflation above grocery inflation even as consumers trade down. 

Inflation Outlook: Gradual moderation

Inflation is expected to remain sticky over the coming quarter, with headline inflation fluctuating between 3.5% and 4.0% and core inflation remaining around 2.6–2.9%. Several competing forces are likely to shape the inflation outlook.

Inflation is expected to remain uneven but still upwardly biased over the coming quarter, with pressure concentrated in food, utilities, services and tariff sensitive categories. The net impact is that headline inflation is likely to fluctuate between 3.2% and 3.6% during Q3, while core inflation remains around 2.4%–2.7%. Several competing forces are likely to shape the outlook.

First, gasoline should provide some relief to headline inflation, although the path remains highly dependent on the timing of the end and intensity of the Middle East conflict. EIA expects retail gasoline prices to average $3.80 per gallon in Q3, down from more than $4.20 per gallon in Q2. However, this does not mean transportation costs will cool across the board. Public transportation, logistics and air travel are likely to remain elevated for some time, reflecting earlier fuel price shocks, capacity constraints, and cost pass-through.

Second, goods inflation is likely to moderate over the next couple of months as global supply chains normalize and inventories are replenished. Some firms also appear to have rebuilt inventories ahead of the introduction of new tariffs, which may temporarily limit immediate pass through to consumers.

Third, labor market cooling is reducing the risk of a sustained wage price spiral, with hiring slowing across most sectors. This should help contain some second-round inflation pressure, particularly in labor intensive service sectors.

Fourth, food remains the clearest upside risk for the rest of Q3. USDA’s July Food Price Outlook projects all food prices rising 3.1% in 2026, with food away from home still running above food at home. Category level pressure remains concentrated in beef, fats and oils, dairy, sugar and sweets. Supply and operating-cost pressures are already passing through more forcefully than earlier in the year.

Fifth, services inflation remains persistent, driven by continued price increases across healthcare, housing, education, and recreation. These categories tend to adjust more slowly than goods and are less likely to reverse quickly even if energy prices soften.

Sixth, wage growth remains resilient at around 3.6%–4.5%, continuing to support labor intensive service industries. While wage growth has moderated from its post-pandemic highs, it remains firm enough to sustain services demand and cost pressure.

Finally, businesses are increasingly passing higher tariff costs through to consumers. This is especially important because demand has remained resilient, giving firms more scope to protect margins rather than absorb higher import costs.

Taken together, these factors suggest headline inflation is likely to remain uneven through Q3 before stabilizing somewhat toward the end of the quarter. Lower gasoline prices should be the main downward driver, helping to offset gradually rising tariff related and services inflation. However, this mix limits the scope for a meaningful decline in underlying price pressures.

Q4 should be more disinflationary than Q3, but not cleanly deflationary. EIA forecasts gasoline prices falling further to around $3.40 per gallon in Q4 as inventories rebuild and the summer demand season ends, which should reduce the energy contribution to headline inflation.

The main Q4 risk is that inflation rotates rather than fades. Energy may cool, but food supply risk, utility cost recovery, tariff pass through, and structurally high health and education costs could keep inflation above a comfortable disinflation path. Consumer expectations also remain elevated: the New York Fed’s July survey put one year inflation expectations at 3.6%, on par with Truflation current month project forecast, suggesting households still expect inflation to remain well above the Fed’s target.

The final theme is the gradual moderation in consumer demand. Excess savings continue to decline and households are increasingly relying on credit or depleting their remaining financial cushion, which could eventually weigh on spending. Slower employment growth should help prevent a renewed acceleration in inflation, although it is unlikely to generate rapid disinflation on its own.

The bottom line is that inflation is expected to remain well above the Federal Reserve’s 2% target. This supports a higher for longer interest-rate environment. Unless inflation surprises materially to the upside or economic activity weakens significantly, the most likely scenario is that the Federal Reserve maintains policy rates through the remainder of 2026, allowing more time to assess whether tariff-related price increases prove temporary or become more broadly embedded in underlying inflation.

Summary

Inflation is uneven and not clearly improving. July shows renewed pressure after June’s temporary cooling, with food, utilities, services, tariffs, healthcare, education, and public transportation keeping inflation elevated.

Some areas are providing relief, especially gasoline, clothing, and communications, but this is not enough to create a broad disinflation trend. Consumer spending remains resilient despite a lower saving rate, wage growth is moderating and a cooling labor market. The main risk is that tariffs and sticky services keep inflation closer to 3%, above the Fed’s 2% target. This supports a higher-for-longer interest-rate outlook through the rest of 2026.

About Truflation

Truflation provides a set of independent inflation indexes drawing on 30+ data partners/sources and more than 15 million product prices across the US. These indexes are released daily, making it one of the most up to date and comprehensive inflation measurement tools in the world. Truflation has been leveraging this measurement tool to predict the BLS CPI number, with a 99.93% accuracy in predicting inflation in the last 12 months.

APPENDIX A

Truflation Category Percentage Change Data

Month-over-Month and Year-over-Year

All Data is based on July 2026