The U.S. July consumer price index, released on Wednesday, reflected a mild pace of growth in inflation that should bolster the case for the Federal Reserve to remain on hold at its next policy meeting on Sept. 16.
Inflation increased by 0.1% in July with the core rate advancing by 0.2%. Growth in inflation moderated to 3.4% and 2.5% on a year-ago basis, respectively. That caused expectations of a September rate hike to decline to 35% and a hike in December to 38% in the immediate aftermath of the data publication.
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Looking deep inside the data, 20.8% of all CPI components increased by more than 4%, 79% advanced by more than 2%, 18.61% increased by under 2% and 58.2% increased by 2% to 4%. Those increases capture the inflation dynamics and help explain the public’s discontent over affordability.
Supercore inflation, which provides insight into the risk of volatile top-line inflation turning into persistent inflation, increased by 2.84%, which is why one should anticipate hawkish Federal Reserve rhetoric to continue even after what amounts to dovish inflation data with respect to the upcoming September meeting.
Over the past three years the inflation outlook has been driven primarily by three shocks: tariffs (goods prices), war (oil and energy) and the AI infrastructure buildout (electronic components and accessories). Since April 2025, those shocks, along with service sector inflation, have pushed top-line inflation higher.
That pressure along with the fact that inflation is now in its sixth year above the Fed’s 2% target, will keep Fed meetings for the remainder of the year as cliffhanger decisions.
While inflation remains sticky in services, rising by 3.1% on a year-ago basis, and in computers and peripherals, which increased by 3.9%, we think that the FOMC will stick to the Fed playbook and look through the combined policy shocks yet again.
Based on the July CPI data, we expect the central bank to keep the federal funds policy rate in a range between 3.5% and 3.75%.
A bit more challenging will be how the Fed explains such a decision to a restive public.
Real average hourly earnings declined by 0.2% from one year ago. That means real wages for the public have been declining or flat since April 2026.
As a result, investors will most likely celebrate muted growth in pricing and a greater probability that the Fed keeps its policy rate on hold whereas consumers—especially middle class and lower-income households—will either increase credit demand or slow consumption in the second half of the year to make ends meet as their real disposable income declines.
This is why the upcoming Federal Reserve policy symposium at Jackson Hole looms large on the economic and policy horizon.
Given the economic and social dynamics at play, not to mention what is going to be a contentious November midterm election, it is crucial that the Fed stick the landing on this decision and convey to the public not only that it intends to restore price stability but also that it will provide a reasonable and credible roadmap of how it is going to achieve that objective.
The data
The primary cause for the modest increase in inflation was the 1.5% decline in energy costs, 2.9% drop in energy commodities and gasoline along with a 0.5% decline in transportation prices.
Those large monthly declines offset the increases of 0.2% in services, 0.4% in medical care costs as well as in used car and truck costs, and 2.2% in airline prices.
The most encouraging aspect of the July CPI was the restrained price increases in housing.
Housing and shelter costs increased by 0.1% in July and were up by 3.3% and 3.2% respectively from one year ago. The policy sensitive owners’ equivalent rent series increased by 0.2% and 3.3% over that same period.
Food prices increased by 0.1% and were up by 3% over the past year. Beef and veal costs advanced by 9.4% from one year ago. Fish and seafood were up by 7% while frozen fish and seafood climbed by 7.8%. Fresh milk was up by 6%. Fresh fruit advanced by 4.9%. Apparel rose by 0.1% monthly and by 3.9% annually.
The takeaway
The July CPI provided a second straight encouraging reading that showed improvement in tariff-related goods and energy-related prices, which are increasing at a more muted pace.
Market expectations for a Fed rate hike in September declined from 47% before the publication of the report to 35% after.
While top-line inflation looks to be increasing between 2.7% and 3%, core inflation looks much better at 2.5%.
But that will prove cold comfort for American households that are experiencing a decline in real wages and disposable income.
As a result, consumption among non-asset-holding households will slow in the second half of the year even as top-line growth may increase as non-residential private sector capital investment and spending by higher-income households drive higher overall growth.
