Consumer prices were up 2.9 percent from a year earlier in July.
This is the first time that overall inflation, measured on a yearly basis, has come in below 3 percent since March 2021.
On a monthly basis, prices rose 0.2 percent, in keeping with expectations.
But some everyday items are still rising in cost - with frozen drinks, eggs and indoor plants seeing among the biggest price hikes since July 2023.
The cost of frozen noncarbonated juices and drinks has risen by 19.2 percent from July 2023 - the most of any grocery item.
16:41
Which everyday items are pushing up inflation?
Frozen drinks, eggs and indoor plants are among the items which have risen substantially in price in the last year.
The cost of frozen noncarbonated juices and drinks has risen by 19.2 percent from July 2023 - the most of any grocery item.
Eggs, meanwhile, have increased by 19.1 percent in price, and frankfurters are now 9.7 percent more expensive.
The cost of bacon, beef roasts, pork chops and butter have also risen notably in the last year.
In terms of non-food items, car insurance is the biggest riser in the last year - with an 18.6 percent price hike.
The cost of photographic equipment and supplies rose by 12.6 percent, while indoor plants and flowers are up 10.6 percent in price.
15:25
Consumers still struggling
Despite today's encouraging inflation figures, consumers are still feeling the pinch of higher prices, experts warn.
Mark Hamrick, senior economic analyst at Bankrate, said that while the 2.9 percent annual inflation rate was 'good news', prices remain elevated for many.
'Evidence is piling up that consumers are struggling under the combined weight of high prices, elevated interest rates and the cooling job market,' he said.
'Even with the "as expected" readings, prices broadly continued to rise last month.'
It comes as home improvement giant Home Depot said consumers are feeling down about the economy.
The company lowered its sales expectations for the year yesterday, noting that customers are spending less on home renovation projects.
Walmart is due to release its quarterly earnings on Thursday, which should give a good indication of how US consumers are faring.
15:00
New York City has biggest inflation problem
New York City has the biggest inflation problem in the US, according to a new WalletHub study.
The research analyzed 23 major cities, comparing how prices have changed in the last two months and in the last year to get a snapshot of how inflation has changed in the short and long term.
It found New York City has seen the most stubborn price growth, followed by Minneapolis, Detroit, Chicago and Honolulu.
Houston, meanwhile, topped the list for the city with the smallest inflation problem, followed by Riverside, California, Denver, Boston and Miami.
14:29
Car insurance prices remain stubborn
While the prices of many essential services and items fell in July, the cost of car insurance remained stubborn.
The motor vehicle insurance index rose 1.2 percent in July, following a 0.9 percent increase in June.
In the last year, the price of motor vehicle insurance has surged by 18.6 percent - making it one of the biggest risers.
13:57
Stocks open flat - taking data in their stride
US stocks opened flat on Wednesday following an inflation report which came in as expected.
The S&P 500 rose 0.3 percent, the Nasdaq Composite slipped 0.1 percent and the Dow Jones Industrial Average rose a marginal 0.09 percent.
This stability is good news for markets and consumer retirement accounts, following a turbulent time in recent weeks.
Investors had been looking toward the consumer price index reading to get a better sense of the overall state of the economy - and the likelihood of a September rate cut.
'Today's as-expected CPI likely won't rock the boat,' said Chris Larkin, managing director of trading and investing for E-Trade from Morgan Stanley.
'Now the primary question is whether the Fed will cut rates by 25 or 50 basis points next month.'
13:39
President Biden says 'real progress' is being made in inflation fight
President Joe Biden said the report 'shows that we continue to make progress fighting inflation and lowering costs for American households.'
'Inflation has fallen below 3 percent and core inflation has fallen to the lowest level since April 2021,' he said in a statement.
'We have more work to do to lower costs for hardworking Americans, but we are making real progress, with wages rising faster than prices for 17 months in a row.'
13:32
Food inflation mostly unchanged - but egg prices up
Food inflation was soft overall in July, rising 0.2 percent from the previous month. This was the same rate it rose in June.
Some items saw significant rises, however.
The price of eggs rose 5.5 percent from June, a faster rate than the 3.5 percent increase in June.
This is due to a re-emergence of bird flu in recent months.
Prices for fruit and vegetables also edged higher, rising 0.8 percent over the month. In June, prices had fallen 0.5 percent.
13:15
What does this mean for your finances?
While prices are still rising year-on-year, they are doing so at a lower rate than expected - which is a boost for the economy. Most economists predicted the annual consumer price index would be 3 percent in July.
Cooling inflation means more than just prices falling for Americans.
It gives the green light to Fed officials to lower interest rates. Such a move would cut borrowing costs for consumers and businesses.
A cut in benchmark borrowing costs would mean a fall in credit card rates and car loans. Eventually, it would also mean mortgage rates would come down.
This would free up more money for Americans to spend, and make borrowing costs cheaper for businesses.
Wall Street likes lower rates, which means stock prices, and 401(K)s, go up.
13:09
Second-hand car and airfare costs have come down
Used car and airfare costs were deflationary in the latest data.
The airline fares index fell 1.6 percent, which matches anecdotal reports from flyers this summer.
13:06
Markets muted following report
US stock futures struggled for direction and dipped slightly following the inflation report this morning.
S&P 500 futures were unchanged, Nasdaq futures fell 0.2 percent and Dow futures fell 0.1 percent.
10-year Treasury yields, which rise when bond prices fall, rose slightly to 3.87 percent.
This suggests traders may have anticipated an even cooler inflation reading.
12:56
Housing costs were the biggest driver of inflation
Housing costs, known as the shelter index, accounted for 90 percent of the monthly increase in inflation, rising 0.2 percent in July.
Economists had expected a lot of the big rental increases of recent years and months to have already shown up in the data.
But the index still ticking higher suggests rises are not over yet.
12:54
Rate cuts on the way for the Federal Reserve
The inflation report, released by the Labor Department Wednesday, likely seals the case for the Federal Reserve to begin cutting interest rates at its next meeting in September.
Economists will now be considering how much the Fed is likely to cut benchmark borrowing rates by.
Lindsay Rosner, from Goldman Sachs Asset Management, said the data 'cleared the way' for a quarter-point rate cut by the Fed in September, 'while not completely shutting the door' on a half-point cut.
Interest rates have remained at a 23-year high between 5.25 percent and 5.5 percent since July 2023.
12:42
Inflation slips to 2.9 percent in July, below expectations
Consumer prices were up 2.9 percent from a year earlier in July.
This is the first time that overall inflation, measured on a yearly basis, has come in below 3 percent since March 2021.
Economists surveyed by Dow Jones were expecting a 3 percent rise.
On a monthly basis, prices rose 0.2 percent, in keeping with expectations.
