Inflation eases in July as gasoline and grocery prices fall

Falling grocery prices helped to keep inflation in check last month. Lettuce prices dropped sharply in July after an outbreak of food-borne illness prompted a recall of some leafy greens. Justin Sullivan/Getty Images North America hide caption

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Justin Sullivan/Getty Images North America

Inflation cooled a bit last month as gasoline and grocery prices fell.

Consumer prices in July were up 3.4% from a year ago, according to a report Wednesday from the Labor Department. That's a smaller annual increase than in May or June.

Prices rose just 0.1% between June and July, after falling 0.4% between May and June. Rising rents and airfares last month were partially offset by falling prices for gasoline and groceries.

Lettuce prices plunged more than 16% in July after an outbreak of food-borne illness prompted a recall of iceberg lettuce from Mexico. Retailers offered deep discounts on other lettuce varieties in hopes of wooing anxious shoppers.

Gasoline prices also dropped in July, although the average price of regular gas is still more than a dollar a gallon higher than before the war with Iran snarled tanker traffic in the Strait of Hormuz, according to AAA.

Stripping out volatile food and energy prices, "core inflation" was 2.5% for the 12 months ending in July. That's down from 2.6% in June. Easing inflation will be welcome news for the Federal Reserve, which has promised to bring price hikes under control.

Investors think the relatively tame inflation report will make it less likely the central bank feels the need to raise interest rates when policymakers meet next month.

Market odds of a September rate hike fell below 40% after Wednesday's cost-of-living report, although there will be another inflation report before policymakers gather again next month.