Consumer prices rose by 3.4% over the past year according to the Bureau of Labor Statistics.
The agency’s monthly report is the culmination of a massive data collection exercise to compile the familiar Consumer Price Index, a measure of inflation for a representative sample of household outlays. Inflation was in line with expectations and declined slightly from the 3.5% rate for the 12 months ending in June and 4.2% in May.
The 3.4% inflation rate is meaningful to individual families as a measure of how much more they are paying for everyday items. But it also poses a challenge for policymakers at the Federal Reserve who are committed to a 2% inflation target but have not achieved it in over five years.
The report was generally positive, as grocery prices and energy costs declined in July from the previous month as oil markets acclimated to ongoing supply disruptions. Another measure of so-called core inflation that strips out the more volatile food and energy components rose by 2.5% versus July 2025 in another hopeful sign.
HOW IS INFLATION MEASURED?
Each month, the Bureau of Labor Statistics embarks on a Herculean task.
The work begins with the specification of a market basket of representative goods and services that consumers buy based upon a periodic survey of 36,000 households. The market basket contains individual items from 200 categories summarized into eight broad headings like food and beverages, medical care, housing, and transportation.
Next the bureau collects around 100,000 separate prices for goods and services from 75 urban areas each month, with about two-thirds obtained in person by visiting brick-and-mortar stores and the rest by telephone or website.
In addition to the goods and services survey, the bureau compiles rent information for around 8,000 individual residential units to estimate shelter costs. To incorporate the impact of owner-occupied homes, the bureau includes a measure called “owner’s equivalent rent” that is an estimate of what the homeowner would pay to rent the property.
The spending categories are weighted to reflect their relative importance to an average family. For example, since housing is the largest single expenditure from most households, the shelter component represents 35% of the Consumer Price Index, while food makes up 14%.
In addition to the item weightings, the bureau also applies geographical weights to account for regional price differentials. Then, certain adjustments are applied to the data. For instance, the bureau makes systematic corrections for “shrinkflation,” when your half gallon of Breyers magically contracts into 1.5 quarts.
There is also an adjustment for changes in quality or performance reflecting increased utility or substitution of materials over time. For example, a new model laptop computer may cost $100 more but contains a faster processor. The bureau uses a statistical adjustment process called hedonic regression to estimate the price change net of improvements. It’s complicated.
This massive trove of data is then combined into a single index for the aggregate price level, compared to a defined base period (1982-84) for which the index value is set to 100. The percentage change in the index value over a given time period is the rate of inflation as measured by the Consumer Price Index. The index increased by 3.4% from July 2025 to July 2026.
WHAT IS DRIVING INFLATION?
By far the biggest component of the year-over-year inflation is energy. Oil prices surged as the U.S. and Israel launched the campaign against Iran in February and were soon reflected at the pump. Gasoline prices are up 25% versus a year ago, and airfares rose 25% compared with a year ago thanks to higher jet fuel costs.
Oil prices are also reflected in the cost of fertilizer and diesel fuel, contributing to the increase in food prices over the past year. And computer software and hardware prices are up by double digits due to the data center build-out.
For you cyclospora fans, good news: Lettuce prices fell 14% last month.
Housing inflation continues to moderate, up just 0.1% over the previous month. That is good news and may help cool overall inflation in the months ahead since housing costs tend to lag other indicators. Home prices and rent are important components of the inflation picture since shelter is the largest element in the Consumer Price Index.
Tariffs also remain a factor, but their impact on inflation is waning. Most of the additional import taxes have been passed on to consumers, with the average family absorbing an additional $900 so far this year in higher prices on top of another $1,000 in 2025, according to the Tax Foundation.
Tariffs showed up initially in the Consumer Price Index as they worked their way through the pipeline but are now baked in and are no longer contributing as much to accelerating costs. Over half of the previously imposed tariffs were overturned by the Supreme Court and are being refunded to the U.S. companies that paid them, but the president has announced a new round of 10% duties on imports from 60 countries.
Before the initial strikes on Iran, consumer inflation was running at 2.4%, on track to reach the Fed’s 2% target later this year and providing a rationale for cutting interest rates. In the absence of war and tariffs, the Consumer Price Index would be very close to target. Now a rate hike is the more likely scenario.
Compared with the rest of the United States, Chattanooga fares somewhat better.
Because of our proximity to major distribution pipelines and the lower cost of doing business, Chattanoogans pay 15% less than the national average for gasoline and 4% less than the statewide average. In fact, the overall cost of living in our area is around 13% below the average for the rest of the country. That includes important categories like healthcare, housing, utilities and groceries, according to Council for Community and Economic Research and real estate firm Redfin.
Inflation is an insidious force that robs families and especially retirees of purchasing power. The latest report shows that we are making progress but still have work to do.
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Christopher A. Hopkins, CFA, is a cofounder of Apogee Wealth Partners in Chattanooga.