Inflation was benign in July, a second month of relief for American consumers and economic policymakers contending with stubborn price pressures.

• But the encouraging inflation picture may already be out of date, with the data largely capturing prices before renewed Middle East fighting sent energy costs notably higher.

Why it matters: The tame reading might give the Fed some breathing room to hold off raising interest rates in September. Still, the Iran war and the whiplash in energy prices it has unleashed leave lingering questions about the staying power of the inflation relief.

What they're saying: "The subsequent reversal in energy prices will filter through into August data if tensions — and the resulting geopolitical premium built into crude oil prices — remain elevated in the coming weeks," Jim Baird, chief investment officer with Plante Moran Financial Advisors, wrote in a client note.

• "Even so, the recent easing of price pressures extends well beyond the energy sector. ... Progress is encouraging — that much is certain — but it's still insufficient to conclude that a return to a steadier inflation environment is imminent," Baird wrote.
• Still, the report gives the Fed "a bit more leeway for patience," he added.

Driving the news: The Consumer Price Index rose just 0.1% in July after falling 0.4% in June, while the year-over-year inflation rate edged down to 3.4%, from 3.5%.

• Core CPI, which excludes food and energy, advanced 0.2% after a flat reading the prior month and was up 2.5% from a year earlier, down from 2.6%.
• On a three-month annualized basis, core inflation was running at roughly 1.6%, down from 2.4% in June.

Between the lines: The report shows the war-induced energy shock continuing to fade. Energy prices declined 1.5% in July, with a nearly 3% drop in gasoline prices.

• But that masks a sharp reversal as July progressed. The average price of regular gasoline climbed to $4.10 a gallon by the end of the month — up from $3.78 just weeks earlier, according to the U.S. Energy Information Administration.
• Gas prices have retreated some this month, though oil prices have spiked higher again, with the U.S. benchmark, West Texas Intermediate crude oil, back above $80 a barrel as renewed Middle East fighting raises fresh concerns about global energy supplies.

Yes, but: There is little evidence of those price pressures expanding into the core inflation gauge the Fed watches most closely. Other potential inflationary factors — like tariffs and the AI buildout — remain risks.

• Prices for core goods gained 0.2% last month after falling by 0.1% in June. That's a mild increase, but computer prices jumped 3.5%, amid higher prices for some Apple products and rising semiconductor costs tied to the AI boom.

Of note: Housing has been a persistent source of upward pressure on core inflation in recent years and remains one of the biggest components of the CPI basket.

• But shelter costs rose just 0.1% for a second consecutive month, although some of that softness reflected a roughly 3% drop in hotel prices.

What to watch: Financial markets now see the chance of an interest rate increase as less likely.

• CME FedWatch odds, which looked like a coin flip before the CPI report, now put the probability of the Fed holding rates steady in September at 59.6%, up from 51.6% a day ago.

When investment on the scale of the current AI boom occurs, it inevitably has to come at the expense of something. All the resources devoted to building data centers and developing AI models would otherwise go to something else.

The big picture: This crowding out is smaller than you might expect, Goldman Sachs economists find in a new note.

• But it does exist, they say, and takes the form of displacing other tech investment and construction, as well as raising corporate borrowing costs.

By the numbers: AI investment will be about $600 billion this year, some 2% of GDP, accounting for 10% of business fixed investment and 15% of equipment investment, economists Jessica Rindels and David Mericle wrote.

State of play: The first crowding-out channel they identify is the displacement of other tech spending at the hyperscalers themselves and at the companies that spend cold, hard cash on AI services.

• Corporate IT budgets, for example, that face new, big costs for AI tokens may seek to cut back on other software and tech spending.
• That doesn't have much impact on overall GDP, however, as it amounts to shifting spending around.

Zoom out: The Goldman team also sees the data center boom crowding out other building activity, as construction labor and equipment is devoted to the AI buildout.

• Gross margins on data center construction are more than twice as high as margins on non-tech projects, Rindels and Mericle wrote, "which has resulted in data centers pulling resources away from other projects."

Zoom in: The hyperscalers' bottomless demand for capital has created a surge in AI-related debt issuance. The rest of the corporate sector faces higher borrowing costs as a result — which may hem in their own investment.

• But the Goldman team finds that this impact has been limited so far, raising corporate borrowing costs by only 0.05 percentage point and perhaps reducing non-AI investment by a modest $10 billion.

The bottom line: "While media reports and market commentary often claim that AI is making a very large contribution to U.S. GDP growth but also crowding out a great deal of other activity," Rindels and Mericle wrote, their analysis "suggests that both claims are exaggerated."