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Inflation ticked higher in July, according to new government data released Tuesday as investors stay alert to how much President Trump’s tariffs are starting to affect consumer costs.
The latest data from the Bureau of Labor Statistics showed that “core” inflation, which excludes volatile food and energy costs, rose 0.3% over the past month, surpassing June’s 0.2% uptick and marking the largest gain in six months.
Annual core prices increased 3.1% in July, also ahead of June’s 2.9% increase and an indication that rising goods inflation is no longer being offset by easing services inflation.
Heading into the report, economists had expected core CPI to rise 3.0% year over year and 0.3% month over month.
On a headline basis, the Consumer Price Index (CPI) increased 2.7% on an annual basis in July, matching June‘s number and slower than economist expectations of a 2.8% rise. Month over month, prices rose 0.2% compared to June’s 0.3% increase, on par with economists’ estimates. The monthly drop was driven by lower gasoline prices and moderately softer food inflation.
“Although core annual inflation is back to its highest level since February, today’s CPI print is not hot enough to derail the Fed from cutting rates in September,” Seema Shah, chief global strategist at Principal Asset Management, wrote in reaction to the report.
Shah noted some evidence of tariff-related pass-through to consumers, though not yet at a level that “rings alarm bells.” One example: footwear prices jumped 1.4% in July from the prior month — the largest monthly increase since April 2021.
Other categories seeing increases included medical care, furniture and bedding, recreation, household furnishings and operations, and used cars and trucks. Airline fares jumped 4% after a 0.1% decline in June, while lodging away from home and communication were among the few major indexes to fall last month, according to the BLS.
Tuesday’s report arrives amid ongoing trade developments that could further alter the US effective tariff rate, now hovering near 18.6% — the highest since 1933, according to the latest Yale Budget Lab estimate.
The back-and-forth raises fresh questions about the Federal Reserve’s rate-cutting path.
Shortly following the report, investors placed a 90% probability the Fed cuts rates by 0.25% at its September policy meeting, up from 57% last month, according to the CME FedWatch Tool. Traders still expect over two rate cuts by December.
“The concern for the Fed is that with inventory run-down, the tariff-induced boost to inflation is likely to grow over the coming months, meaning that inflationary pressures are likely to pick up just as the Fed starts to resume rate cuts,” Shah said.
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