The latest inflation data released by the U.S. Bureau of Labor Statistics (BLS) on Tuesday showed a slight acceleration in consumer prices for July, but the increase was somewhat less than many economists expected.
The consumer price index (CPI), a widely followed gauge of inflation, rose 0.2% in July on a seasonally adjusted basis, bringing the annual increase to 2.7%. These figures came in just below the Dow Jones consensus forecasts of 0.2% monthly growth and 2.8% annual inflation.
When excluding the often-volatile food and energy categories, the core CPI rose by 0.3% for the month and 3.1% year-over-year, slightly exceeding expectations for a 3% annual gain. Federal Reserve officials generally prefer the core CPI as a more stable measure to assess underlying inflation trends. July marked the largest monthly increase in core inflation since January of this year.
Drivers Behind the Increase
Shelter costs played a significant role in July’s inflation uptick, rising 0.2% and accounting for much of the overall CPI gain. In contrast, food prices remained stable, while energy costs actually declined by 1.1%. New vehicle prices, often sensitive to tariffs, were unchanged, but used cars and trucks saw a modest 0.5% price increase. Other categories, like transportation services and medical care services, also experienced notable increases of 0.8%.
Some tariff effects appeared in specific sectors. Household furnishings and supplies prices increased by 0.7% following a 1% jump in June, indicating potential tariff-related inflation pressure. However, apparel prices rose just 0.1%, and core commodity prices overall increased by a modest 0.2%. Interestingly, canned fruits and vegetables, which tend to be imported and tariff-sensitive, showed no price change.
Market Reaction and Federal Reserve Outlook
The inflation report sparked positive reactions in the markets. Stock futures rose, and Treasury yields mostly declined following the data release. Traders also boosted their expectations for the Federal Reserve to cut interest rates again as soon as September, reflecting the growing belief that inflation remains manageable and the economy may require additional stimulus.
The Fed faces a delicate balance. Officials are closely monitoring whether the tariffs imposed under President Donald Trump represent a one-time price shock or if they will trigger sustained inflationary pressure. While economists generally expect tariffs to cause short-term price jumps rather than prolonged inflation, the extensive range of goods affected by these tariffs has raised concerns about longer-term impacts.
Current futures market pricing shows strong odds for a rate cut at the September Federal Open Market Committee meeting, with about a 67% chance of an additional reduction in October, up from 55% just before the CPI release, according to CME Group’s FedWatch tool.
Context Amid Political and Bureau Challenges
The BLS, responsible for compiling this crucial inflation data, is navigating a politically charged environment. President Trump has publicly criticized the bureau, alleging political bias, and recently replaced its commissioner following a disappointing July jobs report. The bureau also faces budget constraints and staffing shortages, forcing it to halt data collection in several cities and impute values for some goods and services, raising questions about data accuracy.
Despite these challenges, the CPI remains a key economic indicator. However, it is worth noting that the Federal Reserve’s preferred inflation measure is the personal consumption expenditures (PCE) price index from the Commerce Department. The CPI and the upcoming producer price index (PPI), scheduled for release on Thursday, feed into broader inflation assessments used by policymakers.
Wage Growth and Economic Sentiment
In a related report, inflation-adjusted average hourly earnings rose only 0.1% in July, translating to a 1.2% gain over the past year. This modest wage growth suggests limited upward pressure on inflation from labor costs, a key factor for the Fed’s rate decisions.
Equity markets welcomed the inflation report, with the Dow Jones Industrial Average rising 263 points (0.6%), the S&P 500 increasing by 0.6%, and the Nasdaq Composite gaining 0.8% to reach a new intraday high. Investors found relief in the data, which tempered fears that tariffs would spark runaway inflation.
As the market digests Tuesday’s inflation data, all eyes are now on Thursday’s PPI report and the Federal Reserve’s annual Jackson Hole symposium at the end of August.
