A widespread inflation measure, which accelerated slightly more than expected in July, was promoted on an annual basis as President Donald Trump’s tariffs showed a largely modest effect and investors gained more confidence in interest rate cuts.
The consumer price index rose 2.7% on a 12-month basis, seasonally adjusted for the month, a 0.2% increase in the month, the Bureau of Labor Statistics reported Tuesday. Estimates of 0.2% and 2.8% compared to the respective Dow Jones.
Excluding food and energy, CORE CPI increased by 0.3% that month, 3.1% from a year ago, but forecasts were 0.3% and 3%. Federal Reserve officials generally believe that core inflation rates are a better read of long-term trends. The monthly core rate was the biggest increase since January, but the annual rate was the highest since February.
A 0.2% increase in Shelter costs helped most of the index rise, but food prices were flat and energy fell 1.1%, BLS said. Used cars and trucks saw a jump of 0.5%, but the new tariff-sensitive vehicle prices remained unchanged. Transport and health services both moved 0.8% more.
The stock market average recorded significant profits after the report, but the Treasury yields were mixed. Traders tightened their bets in September as the Federal Reserve began to cut interest rates again.
The tariffs appeared to have appeared in several categories.
For example, after a 1% increase in June, household furniture and consumables rose 0.7%. However, apparel prices rose just 0.1%, while Core Commodity prices rose just 0.2%. The commonly imported and canned fruits and vegetables were flat, which were tariff sensitive.
“The tariffs are in numbers, but at this point they certainly haven’t been on fire,” former White House economist Jared Bernstein told CNBC. Bernstein served under former President Joe Biden.
This report is both a critical period for the economy and the BLS itself. Trump fired the former BLS commissioner after a surprisingly weak July non-farm salary report earlier this month, and on Monday he said he would nominate Bureau critic Ej Antoni as the new chief.
The bureau is hampered by budget and staffing cuts and has stopped collecting data in multiple cities. In addition, the data had to value many products and services it tracked, leading to questions about accuracy and reliability.
While political jockeys are occurring, Fed officials are closely monitoring inflation measures to weigh the next rate decision in September.
“Inflation is rising, but not as much as some people fear,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “In the short term, the market could accept these numbers because the Fed should focus on the weakness of the labour market and allow the table to cut interest rates in September. In the long term, we will not see the end of price rise as tariffs continue to function through the economy.”
The question is whether tariffs will cause a one-off price rise or will it lead to a permanent rise in inflation? Although economists generally view the tariff impact as the former, the wide range of items covered in Trump’s dict order has caused concern that the effect could last longer.
Futures market prices strongly point to the Fed rate reduction in September. However, a large amount of data during the present could affect both the meeting decisions and the central bank’s future courses. Fed officials have recently expressed an increase in concerns about the labour market, which will portend interest rate cuts.
According to CME Group’s FedWatch tool, traders increased the implicit odds of their September moves after release, increasing the chances of another reduction to around 67% in October.
CPI is not the Fed’s main inflation forecasting tool. The central bank uses the Commerce Department’s Personal Consumption Expense Price Index, but the CPI and the producer price index scheduled to be released Thursday will be fed into that calculation.
BLS said that inflation-adjusted average hourly revenues increased just 0.1% over the month. This brings the annual gain to 1.2%.
