Consumer prices in the United States held steady in July, with a key inflation metric rising less than economists had anticipated, though underlying price pressures showed signs of acceleration. The data presents a complex picture for the Federal Reserve as it weighs its next move on interest rates.
The Consumer Price Index (CPI) rose 2.7% in the 12 months through July, the same pace as in June and slightly below the 2.8% consensus forecast, the U.S. Bureau of Labor Statistics reported on Tuesday. On a monthly basis, the index increased by a seasonally adjusted 0.2%, matching expectations. The stability in the headline number was largely due to falling energy costs, which declined 1.1% for the month and were down 1.6% from a year ago. Gasoline prices, in particular, dropped 9.5% annually, helping to offset increases elsewhere.
However, the so-called core CPI, which strips out volatile food and energy prices, told a different story. Core inflation accelerated to a 3.1% annual rate, up from 2.9% in June and surpassing forecasts of 3.0%. This marked the highest level for core inflation in five months. The monthly core CPI increased by 0.3%, the sharpest rise since January. Federal Reserve officials often view core inflation as a more reliable indicator of underlying price trends.
A detailed look at the components reveals a mixed bag for consumers. Shelter costs, a major driver of inflation, rose 0.2% for the month, with the annual increase slowing slightly to 3.7%. Food prices were flat month-over-month but remained 2.9% higher than a year ago, according to data from Trading Economics. Specific items like roasted coffee and ground beef have seen double-digit price hikes over the past year. Significant price increases were also seen in transportation services and medical care services, which both climbed 0.8% in July.
Economists have been closely monitoring the data for the effects of import tariffs. While the impact appears contained for now, some signs are emerging. Prices for household furnishings and supplies, a tariff-sensitive category, increased by 0.7%. Still, the overall effect was not alarming to most analysts. “There is some sign of tariff pass through to consumer prices but, at this stage, it is not significant enough to ring alarm bells,” Seema Shah, chief global strategist at Principal Asset Management, told CBS News.
The nuanced report has significant implications for the Federal Reserve’s upcoming policy decisions. The cooler-than-expected headline inflation, combined with recent signs of a weakening labor market, has bolstered investor expectations for an interest rate cut. Following the report, traders increased the probability of a rate reduction at the Fed’s September meeting. According to the CME Group’s FedWatch tool, the odds of a September cut rose, with a nearly 67% chance of another cut in October.
“In the short term, markets will likely embrace these numbers because they should allow the Fed to focus on labor-market weakness and keep a September rate cut on the table,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. However, the hotter core reading complicates the central bank’s mandate to maintain price stability. For American households, the pressure continues, as a separate BLS release showed that inflation-adjusted average hourly earnings rose just 0.1% for the month and 1.2% for the year, indicating that wage growth is struggling to outpace the cost of living.
