U.S. consumer prices rose at a slower pace than expected in July, offering some relief to markets even as underlying pressures remained firm.
The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) increased 2.7% year over year, just shy of the 2.8% economists had forecast. On a monthly basis, inflation climbed 0.2%, matching June’s pace and consensus estimates.
However, core CPI—which strips out volatile food and energy prices—ticked up to 3.1% year over year from June’s 2.9%, overshooting the 3% projection. The monthly increase in core prices came in at 0.3%, in line with expectations. While these figures show inflation remains far below its 2022 peak, the uptick in core inflation will likely weigh on Federal Reserve discussions heading into September’s policy meeting.
Energy and Food Provide Breathing Room
Falling fuel costs were a key factor keeping headline inflation in check. The energy index dropped 1.1% in July, with gasoline down 2.2%, marking prices at their lowest summer average—about $3.15 per gallon—since 2021. Over the past year, gas prices have slid nearly 10%. Electricity and natural gas prices also edged lower, reversing June’s gains.
Food prices were largely stable. Grocery costs dipped 0.1% from June, helped by a sharp 3.9% drop in egg prices, though beef rose 1.5%. Restaurant prices rose 0.3% for the month, slightly less than the previous pace, and remain up 3.9% from a year ago.
Falling fuel costs were a key factor keeping headline inflation in check. The energy index dropped 1.1% in July, with gasoline down 2.2%, marking prices at their lowest summer average—about $3.15 per gallon—since 2021. Over the past year, gas prices have slid nearly 10%. Electricity and natural gas prices also edged lower, reversing June’s gains.
Food prices were largely stable. Grocery costs dipped 0.1% from June, helped by a sharp 3.9% drop in egg prices, though beef rose 1.5%. Restaurant prices rose 0.3% for the month, slightly less than the previous pace, and remain up 3.9% from a year ago.
Market Reaction and the Fed’s Dilemma
Equity futures climbed and Treasury yields fell immediately after the report, as investors welcomed the softer-than-expected headline reading. The bond market now sees a clearer path to a Fed rate cut in September. Yet, beneath the surface, some price categories—like household furnishings (+0.7%), footwear (+1.4%), and used vehicles (+0.5%)—showed renewed strength.
Economists caution that the knee-jerk optimism may be overdone. Persistent core inflation above 3% remains “the wrong direction” from the Fed’s perspective. While modest tariff-related price pressures are beginning to appear, much of the cost burden is still being absorbed by businesses and foreign exporters. That buffer may not last, with projections showing a greater share shifting to consumers later this year.
Economists caution that the knee-jerk optimism may be overdone. Persistent core inflation above 3% remains “the wrong direction” from the Fed’s perspective. While modest tariff-related price pressures are beginning to appear, much of the cost burden is still being absorbed by businesses and foreign exporters. That buffer may not last, with projections showing a greater share shifting to consumers later this year.
Outlook
July’s CPI data offers mixed signals: the headline number gives the Fed breathing space, but the rise in core inflation underscores lingering price stickiness. With the labor market showing signs of cooling, policymakers may still lean toward a September rate cut—yet the persistence of core pressures means the easing cycle is unlikely to be aggressive. Markets, for now, are betting the Fed will prioritize growth over an inflation fight that is losing steam but not yet over.
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July’s CPI data offers mixed signals: the headline number gives the Fed breathing space, but the rise in core inflation underscores lingering price stickiness. With the labor market showing signs of cooling, policymakers may still lean toward a September rate cut—yet the persistence of core pressures means the easing cycle is unlikely to be aggressive. Markets, for now, are betting the Fed will prioritize growth over an inflation fight that is losing steam but not yet over.
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