Inflation Cools in July, But Americans Are Spending Less

The economy was a big topic last week, with new reports showing that prices rose more slowly in July but Americans also spent less money at stores. Rising costs at grocery stores and gas stations have made life harder for many families across the United States. Several government reports gave a mixed picture of how the economy is doing — some signs were hopeful, but others showed people are struggling to keep up.

The government reported that consumer prices — what people pay for things like food, gas, and clothing — rose 3.4% in July compared to a year ago. That is a small drop from June, when prices were up 3.5%. But prices are still much higher than before the Iran war started in February, when inflation was just 2.4%. The war has pushed up oil and gas prices, which affects the cost of many other goods.

The Federal Reserve, which is the country's central bank, is trying to decide what to do about inflation. The Fed has the power to raise interest rates, which can slow down inflation but also make it harder for people to borrow money. At its last meeting, the Fed voted 9 to 3 to keep its rate unchanged at about 3.6%, with three members wanting to raise it.

Retail sales — the amount people spend at stores — dropped 0.6% in July, which was the biggest drop since May 2025. That surprised many economists who expected spending to grow. Earlier in the year, many Americans had extra money from tax refunds and spent more in April and May, but that boost seems to have worn off by July.

Even when you take out gas stations and car dealers, spending still fell 0.2% last month. Gas prices went up in recent weeks because of tension in the Strait of Hormuz, a key waterway in the Middle East. Wall Street investors watched the spending data closely, since less spending could mean the Fed is less likely to raise interest rates.

Buying a home got even harder last month, as sales of previously owned homes fell 1.7% in July. The typical home now costs $434,100 — a record high for the month of July — and mortgage rates are the highest they have been in a year. A mortgage is the loan most people use to buy a home, and higher rates mean buyers pay hundreds more dollars each month.

Wholesale prices — the prices businesses pay before goods reach store shelves — also went up more slowly in July. The producer price index rose 4.7% from a year ago, down from 5.5% in June. This is a hopeful sign because when businesses pay less, they may charge customers less too.

Still, there is a worrying trend: prices overall have been rising faster than wages for four months in a row. That means many workers are earning money, but it does not go as far as it used to. If this keeps up, experts say more Americans may be forced to cut back their spending in the months ahead.

One bright spot in the economy is the jobs market. About 209,000 people filed for unemployment benefits last week, which is slightly more than the week before but still a healthy number. The overall U.S. unemployment rate sits at just 4.1%, which is low, and most people with jobs appear to be keeping them.

Despite the weak spending news, the stock market held steady near record highs. The S&P 500 was barely changed, coming off an all-time high set the day before, while the Dow Jones and Nasdaq dipped slightly. Wall Street liked the idea that weaker spending could stop the Fed from raising interest rates, though analysts warned that slow spending can put the brakes on economic growth.