July CPI cools to 3.4%, cutting odds of September Fed hike

U.S. consumer prices rose 0.1% in July, a second straight month of cooling inflation that trimmed September rate-hike odds to 42% and held the annual rate at 3.4%, above the Fed's 2% target.

"In-line inflation will keep the 'no need to hike rates' narrative that took hold after last week's jobs report intact," said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. "There will be another round of inflation data before the September FOMC meeting, so the storyline could still change."

Core CPI, which excludes food and energy, rose 0.2% month over month and 2.5% year over year, matching the Dow Jones consensus. The July reading follows a 0.4% decline in headline CPI for June — the first negative monthly print since the spring's energy shock began to unwind. Energy prices fell 1.5% in July following a 5.7% decline in June, with the gasoline index down 2.9%. The sector remains up 14.7% from a year earlier after the 10.9% surge in March that followed the start of attacks against Iran, and the gasoline index is up 24.6% on an annual basis. Food and shelter each rose 0.1%, with shelter accounting for about two-thirds of the headline increase. A 2.8% drop in lodging-away-from-home costs helped hold the shelter index in check, while owners' equivalent rent — what property owners could charge — rose 0.3%. New vehicle prices gained 0.1%, used cars and trucks rose 0.4%, medical care advanced 0.4%, and airline fares accelerated 2.2%.

The Federal Open Market Committee, which voted 9-3 to hold its key rate steady in July, meets again in September with one more inflation report to digest. Up until a week ago, futures markets had priced in a strong likelihood of a hike next month. But a net job loss in July's employment report, combined with oil prices surging more than 20% last month as U.S.-Iran peace talks collapsed, has taken the immediacy out of a rate increase. Traders now see a stronger chance of a move in October or December.

Fed faces a narrowing path

The stakes extend beyond the policy rate. If inflation stays above 3% while the labor market weakens, the Fed confronts the prospect of tightening into a slowdown — a scenario that would pressure risk assets from equities to Bitcoin. Bitcoin has traded in a narrow range since the release, showing little directional conviction as traders weigh the data against geopolitical risk. Stock market futures rose following the CPI release while Treasury yields moved lower across the curve, reflecting reduced expectations for near-term tightening.

Wells Fargo economists said the report should reinforce the view that the worst of the inflationary effects from higher tariffs and the Middle East conflict are behind, though continued strength in a handful of sectors suggests progress toward 2% will remain gradual. UBS economist Jonathan Pingle cautioned that core inflation likely firmed in July after June's unexpectedly weak reading, driven by a rebound in transportation, medical, and communications services prices. The August CPI report, due before the September meeting, will determine whether the two-month cooling trend holds or whether energy-driven price pressures reassert themselves. Kiplinger's David Payne has warned that the 12-month inflation rate could return near 4% by year-end if a standing resolution with Iran is not reached.

This article is for informational purposes only and does not constitute investment advice.