In July, the U.S. core consumer price index (CPI) — which excludes the volatile food and energy categories — rose 0.3% from June, in line with economists’ expectations, according to Bureau of Labor Statistics data released on August 12. On an annual basis, core CPI increased to 3.1%, marking its fastest pace since January.
The acceleration was largely driven by higher services prices, offset slightly by slower growth in goods prices. The latest figures are adding weight to expectations that the Federal Reserve may cut interest rates as early as next month.
Services Drive Inflation Surge
Excluding energy, services costs saw their largest increase since the start of the year. Key contributors included:
- Airfares: Jumped the most in three years.
- Medical care and recreation: Both posted notable gains.
- Shelter prices: Rose 0.2% for the second consecutive month, reflecting steady housing costs and ongoing declines in hotel rates.
A separate services measure closely watched by the Fed — which strips out housing and energy — climbed 0.5%, one of its strongest readings of 2024. This metric is weighted differently in the Personal Consumption Expenditures (PCE) price index, which the Fed prioritizes when setting policy.
Goods Prices Stay Muted Despite Tariffs
Goods prices, excluding food and energy commodities, rose modestly. Categories exposed to tariffs, such as toys, sporting goods, and household furnishings, continued to post gains but at a slower pace than in June.
While economists have been concerned about potential tariff-driven price pressures, July’s muted goods inflation suggests that so far, consumer demand is not fueling a broader surge in merchandise costs.
Implications for the Federal Reserve
The Fed has left interest rates unchanged in 2025 as policymakers assess the impact of President Donald Trump’s sweeping tariffs on inflation. A sustained pickup in services costs could complicate their decision-making, especially if tariffs add further inflationary pressure on goods.
Market reactions initially saw Treasuries and S&P 500 futures rally, but gains moderated later in the day. Traders are increasingly betting on a rate cut in September.
Wages, Earnings, and Consumer Outlook
A combined report on wages and inflation showed real average hourly earnings climbed 1.4% year-over-year in July, rebounding from June. This growth could help sustain consumer spending — the main driver of the U.S. economy — even in a higher cost environment.
Businesses remain cautious about raising prices, with some delaying adjustments to avoid deterring customers. Upcoming reports on retail sales (Aug. 15) and consumer sentiment will provide further insight into spending patterns.
Political Context and Data Oversight
The inflation release came shortly after President Trump appointed EJ Antoni, chief economist at the Heritage Foundation, to lead the BLS, following the dismissal of the previous agency head. Antoni has been critical of BLS jobs data, while Trump has accused the agency — without evidence — of manipulating figures.
This political shift adds another layer of uncertainty as economic data continues to shape both market expectations and Fed policy.
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