US inflation cooled slightly in July, with the annual headline rate falling from 3.5% to 3.4%, in line with market expectations. Consumer prices rose by just 0.1% during the month, while core inflation, which excludes volatile food and energy prices, increased by 0.2%.
The temporary ceasefire between the United States and Iran in June helped ease some of the pressure on energy prices. However, energy costs remain significantly higher than before the conflict began, meaning inflationary risks have not disappeared entirely.
Following the release, markets reduced the likelihood of the Federal Reserve raising interest rates at its September meeting. Despite this, the US dollar strengthened during the session, demonstrating that currency movements are often driven by a combination of positioning, expectations and wider market sentiment rather than the headline figure alone.
Attention in the UK turned to the latest growth figures, which showed that the economy expanded by 0.4% during the second quarter of 2026. Although this represented a slowdown from the 0.6% growth recorded during the first quarter, the result demonstrated that the economy remained more resilient than many had feared.
June was the standout month, with GDP growing by 0.3% compared with expectations for no growth. Activity was supported by warmer weather, the beginning of the men’s World Cup and a temporary reduction in concerns surrounding the conflict with Iran.
The services sector, which accounts for the largest proportion of UK economic output, expanded by 0.5% during the quarter. Information, communications and professional services were among the strongest-performing areas. Construction output also increased by 0.3% across the quarter, while industrial production remained broadly unchanged.
However, the monthly figures presented a slightly more mixed picture. Services output grew by 0.4% in June, helping to offset declines of 0.2% in industrial production and 0.1% in construction.
While the figures provide some encouragement, the outlook remains uncertain.
Renewed geopolitical tensions, elevated energy prices and the possibility of further inflationary pressure could weigh on growth during the second half of the year.
Looking ahead, this afternoon brings the release of July’s US Producer Price Index, which measures changes in the prices received by domestic producers and can provide an early indication of future consumer inflation.
Headline producer prices are expected to rise by approximately 0.2% during the month, following a 0.3% decline in June. Core producer prices, which exclude food and energy, are forecast to increase by around 0.3%.
A higher-than-expected reading could revive expectations of a September interest-rate increase and provide further support for the dollar. Conversely, a softer result could strengthen the case for the Federal Reserve to leave rates unchanged, potentially placing renewed pressure on the US currency.
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