WASHINGTON — An inflation measure closely tracked by the Federal Reserve rose 2.5 percent in July over the prior year, as the central bank contemplates cutting its key interest rate next month for the first time in four and a half years despite prices rising faster than the Fed’s 2 percent target.

Prices rose just 0.2 percent between June and July, the Commerce Department said Friday, up a tick from the previous month’s 0.1 percent increase. July’s monthly inflation figure extends a trend of cooling price increases, providing justification for the Fed to start cutting interest rates.

Compared with the previous  year, July’s inflation number was unchanged from June.

The slowdown in inflation could upend former President Trump’s efforts to saddle Vice President Harris with blame for rising prices. 

Still, despite the near-end of high inflation, many Americans remain unhappy with today’s sharply higher average prices for such necessities as gas, food, and housing compared with their pre-pandemic levels.

Excluding volatile food and energy costs, so-called core inflation rose 0.2 percent between June and July, the same as in the previous month. 

Measured from a year earlier, core prices increased 2.6 percent, also unchanged from the previous year. Economists closely watch core prices, which typically provide a better read of future inflation trends.

Friday’s figures underscore that inflation is steadily fading in America after three painful years of surging prices hammered many families’ finances. 

According to the measure reported Friday, inflation peaked at 7.1 percent in June 2022, the highest in four decades.

Friday’s report also showed that healthy consumer spending continues to power the economy. Americans stepped up their spending by a vigorous 0.5 percent between June and July, up from 0.3 percent the previous month.

And incomes rose 0.3 percent, faster than in the previous month. Yet with spending up more than income, consumers’ savings fell, the report said. The savings rate dropped to just 2.9 percent, the lowest level since the early months of the pandemic.

The Fed tends to favor the inflation gauge that the government issued Friday — the personal consumption expenditures price index — over the better-known consumer price index. 

The PCE index tries to account for changes in how people shop when inflation jumps. It can capture, for example, when consumers switch from pricier national brands to cheaper store brands.

In general, the PCE index tends to show a lower inflation rate than CPI. In part, that’s because rents, which have been high, carry double the weight in the CPI that they do in the index released Friday.

In a high-profile speech last week, the Fed chairman, Jerome Powell, attributed the inflation surge that erupted in 2021 to a “collision” of reduced supply stemming from the pandemic’s disruptions with a jump in demand as consumers ramped up spending, drawing on savings juiced by federal stimulus checks.

With price increases now cooling, Mr. Powell also said last week that “the time has come” to begin lowering the Fed’s key interest rate. Economists expect a cut of at least a quarter-point cut in the rate, now at 5.3 percent, at the Fed’s next meeting in mid-September. 

With inflation coming under control, Mr. Powell indicated that the central bank is now increasingly focused on preventing any worsening of the job market. The unemployment rate has risen for four straight months.

Reductions in the Fed’s benchmark interest rate should, over time, reduce borrowing costs for a range of consumer and business loans, including mortgages, auto loans and credit cards.

Consumers are still willing to boost their spending, fueling steady growth in the economy. On Thursday, the government revised its estimate of growth in the April-June quarter to a healthy annual rate of 3 percent, up from 2.8 percent.