Rapid Response - US CPI suggests a higher chance of September Fed cut, but risks still present

The equity market has cheered a higher chance of a Fed cut next month. But the CPI report also included evidence of broader price pressures. Other data suggests that businesses are still in wait-and-see mode, pointing to short-term stagflationary risks. A deteriorating growth outlook suggests that inflation will eventually return to target. But there is still a chance of a relatively hawkish Fed outlook next month.

• US headline CPI inflation increased by +0.2% on a seasonally adjusted basis in July, as expected, after rising +0.3% in June, the U.S. Bureau of Labor Statistics reported today.

• Over the last 12 months, the headline index increased +2.7%, slightly below the +2.8% consensus forecast.

• Core CPI less food and energy rose +0.3% in July, also in line with expectations, following a +0.2% increase in June.

• The Core CPI index rose by +3.1% over the last year, up from +2.9% and above the +3.0% consensus expectation.

• The index for shelter rose +0.2% in July and was the primary factor in the headline monthly increase.

• The Fed's "supercore" measure of core services ex-housing rose by +0.5% in July, up from +0.2% in June, and +3.2% yoy, rising from +3.0% last month.

• The food index was unchanged over the month as the food away from home index rose +0.3% while the food at home prices fell -0.1%.

• Other prices that increased over the month include medical care (+0.8%), airline fares (+4.0%), recreation (+0.4%), household furnishings and supplies (+0.7%), and used cars and trucks (+0.5%).

• In contrast, the index for energy fell by -1.1% in July as the index for gasoline decreased by -2.2% over the month.

• Lodging away from home (-1.3%) and communication (-0.1%) were among the few major indices that decreased in July.

• Also released yesterday, real average weekly earnings increased to +1.4% yoy, up from a revised +0.8% last month.

• NFIB Small Business Optimism was also firmer, rising from 98.6 to 100.3. However, the uncertainty index also rose sharply from 89.0 to 97.0 over the month.

• Tariff talks with China have also been extended by 90 days, as expected.

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• The slightly weaker headline reading has consolidated market pricing of a cut from the Federal Reserve at the upcoming meeting next month, sending equities higher.

• PPI inflation is expected to be relatively benign later this week and closer to the Fed target at +2.5% yoy.

• The impact of shelter prices is expected to wane. However, the breadth of the price increases in the report also warns of building inflation pressures across core services, consistent with readings in the ISM survey.

• The fact that longer-dated yields rose after the report may yet be significant. Moreover, the expected Fed Funds rate at the end of next year has risen from 2.94% to 3.06% over the last two weeks, despite the recent downward revisions in payrolls.

• Further easing is very possible as talks with China delay the most consequential tariffs, or if growth slows faster than anticipated. Uncertainty in the NFIB survey indicates caution and likely delays in investment and hiring.

• Stagflationary risks are apparent. But ultimately, we expect a short-term price shock to give way to disinflation. However, there is also a good chance that the Fed could surprise on the hawkish side when it comes to the outlook next month.

Source: Bloomberg, BLS, 12th August 2025

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