Year-over-year inflation in the United States reached its lowest level in more than three years in July, the latest sign that the worst price spike in four decades is fading and setting up the Federal Reserve for an interest rate cut in September.

Wednesday's report from the U.S. Department of Labor showed that consumer prices rose just 0.2 per cent from June to July, after dropping slightly the previous month for the first time in four years.

Measured from a year earlier, prices rose 2.9 per cent, down from three per cent in June. It is the mildest year-over-year inflation figure since March 2021.

The government said nearly all the increase last month reflected higher rental prices and housing costs, a trend that, according to real-time data, is easing.

For months, cooling inflation has provided gradual relief to America's consumers, stung by price surges that erupted three years ago, particularly for food, gas, rent and other necessities. Inflation peaked two years ago at 9.1 per cent, the highest level in four decades.

Inflation has taken a central role in the presidential election, with former president Donald Trump blaming the Biden administration's energy policies for the price increases. Vice-President Kamala Harris said on Saturday she would soon unveil new proposals to "bring down costs and also strengthen the economy overall."

Excluding the volatile food and energy categories, so-called core prices climbed 0.2 per cent from June to July, after a 0.1 per cent increase the previous month. Compared to a year ago, core inflation rose 3.2 per cent, down from 3.3 per cent in June, the lowest since April 2021.

Core prices are closely watched by economists because the information typically provides a better read of where inflation is headed.

Jerome Powell, chair of the U.S. Federal Reserve, has said he is seeking additional evidence of slowing inflation before the Fed begins cutting its key interest rate. Economists widely expect the Fed's first rate cut to occur in mid-September.

When the central bank lowers its benchmark rate, over time it tends to reduce the cost of borrowing for consumers and businesses. Mortgage rates have already declined in anticipation of the Fed's first rate reduction.