U.S. CPI : Inflation mixed, path to cuts intact

What happened?

Today, the latest CPI release from the Bureau of Labor Statistics showed a +0.2% MoM increase in headline CPI. Assessing the monthly figures, shelter costs increased by +0.2%, in-line with the +0.2% increase in June. Prices also increased in airline fares (+4.0%), medical care (+0.7%) and recreation (+0.4%) while the index for lodging away from home (-1.0%) and communication (-0.3%) registered a decrease over the month. Core CPI rose in-line with expectations of +0.3% in July, up from +0.2% in June.

The uptick in core CPI can be attributed to the increase in shelter costs. When assessing the Fed’s closely watched ‘supercore’ inflation rate, which excludes shelter from the overall Core services figure, the latest reading reported an increase of +0.4%, up from +0.3% the month prior, pointing to growing price pressures in the service sector despite emerging broader macroeconomic headwinds. Moreover, prices for food remained unchanged in July (following a +0.3% increase the month prior) with the ‘Food-atHome’ index decreasing by -0.1% over the month. ‘Food-awayfrom-Home’ (i.e., restaurants) index increased by +0.3% over the month, with the corresponding YoY figure increasing slightly from +3.8% the month prior to +3.9%. Broader energy prices decreased by -1.1% in July after increasing by +0.9% in June. Overall, the index for motor vehicle insurance (+5.3%), medical care (+3.5%) registered the largest increases over the past 12 months.

What does it mean for investors?

July’s CPI report paints a mixed picture: while headline inflation came in slightly below expectations at +2.7% YoY, core CPI – which excludes volatile food and energy – came in stronger at 3.1% YoY. In addition, month-on-month, core CPI rose +0.3%, its largest increase in five months. Gasoline prices declines in July, offering some relief, but broader consumer categories reflected sticky inflation, likely driven in part by imposed tariffs. Notably, apparel and footwear saw significant price jumps, largely because of their reliance on imports from countries like China, Vietnam, and India. Children’s apparel surged +3.3%, while footwear rose +1.4% on a MoM basis. Airline fares, after several months of declines, rebounded sharply, climbing by over +4% in July. These price trends suggest that tariffs are slowly seeping through to U.S. consumers. Overall, the report signals that while certain categories are seeing renewed price pressures, broader inflation trends remain contained. With growth continuing to slow and inflation moderating, the Fed may soon pivot away from its wait and watch stance and deliver a rate cut as soon as September.

The Fed will factor in Core PCE, its preferred gauge of inflation, which stood at 2.8% YoY as of June, still notably above the Fed’s 2% inflation target, once they become available on August 29. The Fed remains committed to lowering inflation to the 2% target and with headline CPI coming in lower than market expectations especially amidst concerns of tariff-induced inflation, the Fed will consider this datapoint along with a full set of CPI and labor market data before going into the September meeting. Recent dissents by Governors Waller and Bowman aside, additional FOMC members have expressed their perceptions of growing downside risks to the labor market underpinning our base case expectation for the Fed to deliver its next rate cut either in September or October this year.