- July inflation data suggests the FOMC’s dual mandate may not be in as much of a pickle as economists had previously feared. The CPI rose 0.2% month on month in July. It was 2.7% year on year, the same level as the month before. Core inflation edged up to 3.1%, however, keeping it above the Fed’s 2% target. Flatter headline inflation and falling energy prices bolstered expectations for a September rate cut, though analysts warned that sticky service costs and potential tariff impacts could limit further easing in 2025. Markets rallied on the data, but Fed officials are likely to remain focused on upcoming jobs reports before committing to additional cuts.
July’s inflation report went about as well as the Fed (and the White House) could have hoped for.
The Consumer Price Index (CPI) summary released Tuesday reported inflation notched up 0.2% in July, that’s down compared with the 0.3% increase in June. Over the past 12 months, this brings the headline inflation rate to 2.7%—admittedly still comfortably ahead of the Federal Reserve’s 2% target but the same level as it was in June.
Shelter was the primary factor for the overall rise, the Bureau of Labor Statistics (BLS) said, rising 0.2% in July. Meanwhile, key categories such as the food index were largely unchanged, with food at home falling 0.1% and food away from home rising 0.3%. Elsewhere, the energy index fell 1.1% while gasoline costs were also reduced by 2.2%.
Supporters of Trump 2.0 will use the relatively flat report as ammunition to urge Federal Reserve Chair Jerome Powell to cut the base interest rate, arguing that tariffs are not (yet) proving as inflationary as many economists previously feared.
Indeed, President Trump wrote on Truth Social moments after the data was released: “Jerome ‘Too Late’ Powell must NOW lower the rate. Steve ‘Manouychin’ really gave me a ‘beauty’ when he pushed this loser. The damage he has done by always being Too Late is incalculable. Fortunately, the economy is sooo good that we’ve blown through Powell and the complacent board.”
When the White House announced its tariff regime, particularly following its “Liberation Day” announcements in April, analysts and investors feared the significant added costs to global trade would be passed to American consumers. Surveys indicate that this is the intention of the majority of businesses: to pass the increased levies on to the public, thus pushing up inflation.
But with various agreements with key partners now made, and delays with the likes of China to boot, economists are now beginning to wonder when (or if) the sharpest end of the tariff agenda will be felt.
The report is likely to have eased some of the friction members of the Federal Open Market Committee (FOMC) were readying themselves for. For many months, the FOMC had been warning it was mindful of the two sides of its mandate when making decisions about the base rate.
Those two sides are maximizing employment and keeping inflation to 2%. With a shocking and negative update on the labor market from earlier this month, a spiking inflation report for July would have put those two factors at even greater odds.
As it is, many analysts are seeing the inflation report as another tick in the box for a cut at the FOMC’s next meeting in September. After all, they believe it means Powell and the FOMC can breathe easier about tariffs and give the economy and employment market a boost by lowering interest.
At the opening bell, investors certainly seemed to think so: The S&P 500 was up 0.65%, the Dow Jones 0.6%, and the Nasdaq 0.76%.
However, while headline inflation stayed below 3%, core inflation (excluding the often volatile food and energy categories) rose to 3.1% over the past 12 months.
Seema Shah, chief global strategist at Principal Asset Management, wrote in a note seen by Fortune that July inflation data isn’t hot enough to “derail the Fed from cutting rates in September. There is some sign of tariff pass-through to consumer prices, but at this stage, it is not significant enough to ring alarm bells.”
But Shah added that further cuts in 2025 are not a foregone conclusion: “The concern for the Fed is that, with inventory run down, the tariff-induced boost to inflation is likely to grow over the coming months, meaning that inflationary pressures are likely to pick up just as the Fed starts to resume rate cuts. Markets like today’s inflation print, as it means the Fed can lower rates unheeded next month; rate cut decisions in October, December, and beyond may well be more complicated.”
Don’t count your cuts
While Powell has been fending off criticism from the White House, analysts are warning against baking in further and significant cuts for the remainder of the year.
The FOMC has its next meeting in September, followed by two more in October and December, and one member, Michelle Bowman, has already confirmed she would be open to such a trajectory.
Indeed, UBS’s Ulrike Hoffmann-Burchardi, CIO for the Americas and global head of equities, wrote in a note to clients: “With overall inflation likely under control amid a slowing economy, our base case remains that the Fed will resume rate cuts at the September meeting and continue cutting for a total of 100 bps.”
And CME’s FedWatch shows more than 94% of the market expect a cut at the next meeting.
Yet analysts are wary of being overly confident about the next meeting. Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management, wrote in a note to clients that she was still expecting a 0.5% cut in rates by the end of the year, but is proceeding with caution: “It seems fair to say that the Fed could be considering a move in September, but I don’t think a cut at that meeting is as much of a given as market pricing is implying. We will get plenty of data between now and then that could give the Fed pause one more time before taking action in the fourth quarter.”
Michael Pearce, deputy chief U.S. economist at Oxford Economics, wrote in a note to Fortune that the details of the CPI report don’t even guarantee a September cut.
“The larger rise in core prices in July provides mixed evidence around the tariff boost to inflation. For the Federal Reserve, inflation is much further from its target than the unemployment rate, which is why we expect them to hold off rate cuts another few months. However, another weak set of jobs data in August would force their hand early,” Pearce wrote. “Core inflation edged up to 3.0% in July, and we expect it will rise further to a peak of 3.8% by the end of the year as tariffs bleed through more fully to consumer prices.
“In our view, the upside risks to inflation will keep the majority of the FOMC preferring to sit on the sidelines for a few more months. The large downward revisions included in the July employment report heightened concerns around the labor market, and another weak report in August could tip the odds in favor of a September rate cut.”
Pearce was echoed by Bill Adams, chief economist for Comerica Bank, who said the Fed is now less likely to cut because the inflationary factors in the July report came from sticky service prices as opposed to tariff-related goods. Adams said: “Jobs data scheduled for release in early September will have more sway over the Fed’s next decision than this inflation report.”
