U.S. core CPI was reported in line with expectations for the month of July, bucking the trend of cooler CPI prints that had been in place for most of 2025. The measure was up +0.2% month-over-month (MoM) and +3.1% year-over-year (YoY) versus consensus expectations for +0.3% and +2.9%, respectively; the annual reading on the measure was the highest since February. Headline CPI came in a bit light on a YoY basis at +2.7% versus the +2.8% estimated and was up +0.2% MoM.
While much of the emphasis coming into the print was on the potential for higher goods prices, it was the services component of CPI which exhibited acceleration in this month’s report. Shelter was up by +0.2%, continuing to drive the overall gains, while supercore services, which excludes the housing component, was up by +0.5% – its biggest gain since January. Contributing to the sharp move higher were airfares (+4.0%), automotive maintenance (+1.0%), and medical care services (+0.8%).
Goods prices were a mixed bag and perhaps point to the stop-start nature of tariff implementation over the past four months. Notable areas of increase were in furniture & bedding (+0.9%) and video & audio equipment (+0.8%), while appliance prices (-0.9%) were down and new cars were flat. Pulling it all together, core goods prices less autos were up only +0.2% – consistent with the Fed’s longer term inflation target.
Positives were also found in food and energy prices, which trended lower in the month, providing some relief to still cautious U.S. consumers. Food at home was lower by -0.1% in the month, while overall energy prices were off by -1.1%, with gasoline down -2.2%. The continued improvement in these components has contributed to the drift lower in headline inflation. While not as critical in terms of Federal Reserve decision making, these prices tend to have a meaningful impact on spending power, particularly for lower- and middle-income households.
In terms of market reaction, it would appear that investors, particularly in the bond market, were braced for a hotter-than-expected print. With the probability of Fed cut in September now over 90%, yields at the short end of the curve were lower initially following the release, while longer yields rose, perhaps indicating an acknowledgment of higher growth prospects, a longer period of above-target inflation, and continued deficit concerns. Equity markets, however, took the report in stride, with U.S. stocks moving up in the early hours of trading while volatility, as measured by the VIX, moved lower.
Our view is that today’s report is supportive of a rate cut in September. In addition, the Fed will have three more major data releases ahead of its next meeting to consider – July PCE, August CPI, and August non-farm payrolls – with the latter the most likely to catalyze the Fed back into action. The relative strength or weakness of the overall economy will also be a driving factor in terms of the Fed’s messaging coming into and out of both the Jackson Hole symposium later this month and the September meeting, with greater emphasis on business confidence and forward-looking measures such as new orders and bookings as they tend to have a more direct impact on hiring.
While there is likely little to disrupt the near-term path to lower rates, any evidence that services prices are reversing their downward trend could put in jeopardy rate cuts slated for 2026 and keep the Fed above the 3.5% mark moving into middle of next year. In addition, evidence of continued political pressure on the Federal Reserve could also push yields higher and disrupt efforts to effect more accommodative policy. As such, we recommend a renewed focus on fixed income allocations, as both duration and credit decisions will be critical in positioning during a period of shifting policy. In addition, we believe even a modest improvement in the financing backdrop could be an accelerant for business and consumer investment, and would benefit smaller companies broadly, but more specifically those in more cyclical industries which are more interest-rate sensitive.
With earnings season winding down, we expect that volatility could increase over the next two weeks, with greater focus on macro data in the absence of company announcements. This week, we are looking ahead to U.S. PPI on Thursday, as well as University of Michigan Consumer Sentiment and U.S. retail sales on Friday – all of which are likely to be rigorously evaluated for signs of tariff impact.
