US CPI July: Does Inflation Data Bolster Fed Rate Cut Expectations?

July CPI Data: An Overview

At 20:30 Beijing time on Tuesday, the US July unadjusted core CPI annual rate further rose to 3.1%, a five-month high, higher than the market expectation of 3.0%. The core CPI monthly rate further rose to 0.3%, a high since January, in line with market expectations, and higher than the previous value of 0.20%. The overall CPI annual rate was 2.7%, lower than the expected 2.8%, and the same as the previous value. The CPI monthly rate was 0.2%, in line with expectations, and lower than the previous value of 0.30%.

Financial Market Reactions

After the data was released, spot gold soared to a high of $3354/oz, sharply retraced, and then pulled up again; the US dollar index fell by more than 30 points in the short term; non-US currencies generally rose, with the pound against the dollar breaking through 1.35; the US dollar against the Japanese yen fell below 148; the euro against the US dollar pulled up nearly 50 points in the short term. US short-term interest rate futures fell, and traders increased their bets on a Federal Reserve rate cut in September, continuing to bet on a rate cut in December.

Expert Analysis and Expectations

Analyst Anstey pointed out that this is the first time in six months that a monthly core CPI reading has failed to fall below the median expectation. The question is, is this a turning point, and will inflation in the coming months begin to exceed expectations? The July core CPI was slightly higher than expected, and Fed Chairman Powell has been consistently saying that policymakers are focusing on 12-month inflation. So, this is not a good sign. The "supercore services" indicator—once a focus of Fed policymakers—was a significant driver of inflation in July. This indicator, which excludes housing, goods, food, and energy costs, rose 0.48% for the month. That was the largest gain since January and the second-largest in 16 months. We rarely see such a big jump lately. Airline ticket prices were an important factor in the rise of "supercore services." That category's 4% gain for the month was the highest in more than three years. Another category pushing the indicator higher was dental services. Its 2.6% gain was a record.

Impact of Tariffs

Anstey noted that new car prices were flat for the month. CIBC Capital Markets' Katherine Judge mentioned that auto industry expected prices to rise in the fall when new models come out this year. "We expect new car prices to rise in the future due to tariffs, as new models will enter dealerships, and inventories before the implementation of tariffs will gradually decrease." Economists have been watching to see if categories like furniture have been affected by tariffs. That category was up 0.7% for the month, which marks a slight slowdown in growth. Even so, its 2.4% year-over-year gain remains a two-year high. Video and audio products were another category closely watched for tariff effects. The monthly gain was 0.8%, which, like furniture prices, was the smallest since May. On a year-over-year basis, the increase was 0.4%, which doesn't sound like much, but it was the biggest since 2021. Clothing prices rose 0.1% month over month, which again was the smallest gain since May. From a tariff-impact perspective, at least initial observations suggest that the impact has not strengthened, and may even have weakened slightly.

Food and Energy Price Declines

Notably, two categories that Trump often emphasized—grocery and energy costs—both fell in July. "Food at home" prices declined 0.1%, while energy prices fell 1.1%, with gasoline prices falling 2.2%.

Monetary Policy Outlook

Analyst Jersey's initial take on the July US CPI report was that the Treasury market appeared concerned about higher CPI, but the overall CPI monthly data suggested that PCE data received before the September meeting may be close enough to the 2% target to allow the Fed to ease monetary policy in September. Jersey said: "We still think the market is poised to move higher." "With the new bright spots in the labor market diminishing, perhaps merely avoiding upside inflation surprises will be enough to allow the market to continue to digest more easing," said Zachary Griffiths, head of investment grade and macro strategy at CreditSights. "Overall, we think this statement is neutral, but we still believe that the Federal Reserve will cut interest rates in September, and our basic forecast is a larger cut of 50 basis points, because the labor market has become the focus of policymakers."