U.S. consumer prices rose at a slower pace than anticipated in July, offering some relief to inflation worries and raising the likelihood that the Federal Reserve will lower interest rates in September.
The Consumer Price Index (CPI) increased 0.2% on a seasonally adjusted basis for the month and 2.7% compared to a year earlier, according to government data. Both figures came in slightly below market expectations, which had projected annual inflation at 2.8%.
When excluding the more volatile food and energy categories, the core CPI rose 0.3% for the month and 3.1% from a year earlier, aligning closely with forecasts. While the monthly core increase marked the largest since January, the annual rate was the highest since February, underscoring that inflation pressures persist despite the slowdown in the headline rate.
Shelter costs one of the largest components of the index rose 0.2%, driving much of the monthly gain. Food prices were flat, while energy costs dropped 1.1%. Used cars and trucks saw a 0.5% price increase, while transportation and medical care services both climbed 0.8%.
The data suggests that recent tariffs imposed by the administration are beginning to influence certain product categories, such as household furnishings, which rose 0.7% in July. However, other tariff-sensitive goods, including apparel and canned produce, saw little to no price change.
Following the release, financial markets reacted positively. Stock futures moved higher, Treasury yields declined, and traders increased their bets on a September rate cut. According to CME Group’s FedWatch tool, the probability of another cut in October also rose to about 67%, up from 55% the previous day.
Economists are now debating whether the tariffs will lead to a temporary price surge or have longer-lasting inflationary effects. Many expect that the impact will be short-lived, but the breadth of goods affected by the trade measures has raised the risk of a more sustained price climb.
Federal Reserve officials will continue monitoring inflation alongside labor market data before making their decision at the September policy meeting. While the CPI is not the Fed’s primary inflation gauge, it plays an important role in shaping expectations, particularly when combined with other measures like the Producer Price Index and the Personal Consumption Expenditures Price Index.
Real average hourly earnings, adjusted for inflation, rose just 0.1% in July, bringing the annual gain to 1.2%, suggesting that wage growth remains subdued despite the relatively high inflation levels.
