The US consumer price index (CPI) rose 2.7% year-on-year in July, unchanged from the June figure and below the market estimate of 2.8%. CPI remained at its lowest annual inflation rate since February 2021. Monthly CPI eased, rising to 0.2% from 0.3%, in line with market expectations. Gasoline and fuel oil prices continued to decline sharply, a key factor in easing inflation.
Core CPI, which excludes food and energy and is considered a better gauge of inflation trends, moved in the opposite direction. Annual CPI climbed to 3.1% in July, up from 2.9% and above the market estimate of 3.0%. This marked the highest level in five months. Monthly, the core rate rose 0.3%, up from 0.2% and in line with the market estimate.
The rise in core CPI reflects the effect of Trump's tariffs, which took effect in April and continue to filter through the economy. The tariffs are expected to dampen growth and raise inflation, as US consumers pay more for imported goods.
Inflation Report Likely Cements Rate Cut in September
The Federal Reserve has been on an extended pause and hasn't lowered interest rates since December 2024. That is expected to change at the next Fed meeting, barring an extreme surprise. The markets have currently priced in a 94% likelihood of a rate cut at the Sep. 17 meeting, up sharply from 84% just before the inflation release. Investors were clearly relieved that CPI remained at 2.7% and didn't rise to 2.8% as expected, anticipating that this will clear the path for the Fed to lower rates next month.
US Dollar Shows Muted Response, Stock Market Edges Higher after Inflation Report
The US dollar is showing little reaction following the release of the US inflation report, while the US stock market is in positive territory.
The GBP/USD currency pair is trading at 1.3482, up 0.35% on the day, but most of these gains were recorded ahead of the inflation release.
The US stock market has posted gains on Tuesday, as investors reacted positively to the inflation report.
The S&P 500 Index has climbed 26 points (0.41%) and is trading at 6399.
The Nasdaq 100 Index has climbed 86 points (0.36%) and is trading at 23,613.