United States
Consumer prices rose 0.2% in July, keeping CPI at 2.7% year-on-year. Core prices rose 0.3%, taking core CPI from 2.9% to 3.1%, the highest since February 2025. Tariff-related inflation accelerated more modestly but some inflation in core services kept core CPI elevated.
Although elevated core CPI will help keep the Fed in “wait and see” mode for now, we nonetheless suspect the Fed will remain biased toward cutting rates later this year.
Tariffs continued to have a contained inflation impact
Energy prices fell -1.1% month-on-month in July, driven by falls in gasoline and electricity prices. Elsewhere, food prices were flat in July, with grocery prices falling 0.1%, despite notable price rises in meats and some largely imported items like coffee and citrus fruits.
Figure 1: Core services help push inflation higher1
Core goods inflation remained relatively contained at 0.2% in July. Tariff-related goods inflation even moderated from 0.7% to 0.3% on a month-on-month basis, reaching 0.7% year-on-year (Figure 2). We expect tariff-related inflation may peak over the coming months but will continue to watch it closely.
Figure 2: Tariff-related inflation remained relatively contained in July2
“Supercore” categories keep core CPI elevated
“Supercore” services CPI (a category that excludes food, energy and rental components and a segment closely watched by the Fed), accelerated from 3% to 3.2% year-on-year. This was largely driven by a 4% increase in airline fares in July (its highest monthly acceleration since May 2022), as well as a 2.6% acceleration in dental care services prices (the fastest on record).
Notably, however, shelter (the largest component of CPI), fared better. It continued to ease, reaching 3.7% year-on-year, its slowest level since October 2021. Albeit it remained stable on a month-on-month basis at 0.2%. Excluding shelter, headline CPI was 2.1%, just above the Fed’s target.
Figure 3: Supercore services accelerate but the shelter component continues to ease3
We suspect the Fed will remain biased toward rate cuts in the coming months
Inflation risks related to tariffs will continue to prompt the Fed to take a “wait and see approach” to further rate cuts. The central bank may also closely look at the mixed core services data. Any delay in rate cuts may help keep the window open for investors to move out the yield curve and lock-in compelling yields in fixed income.
We suspect that the Fed will nonetheless remain biased to restarting its rate cutting cycle in the coming months, which may also benefit fixed income investors. We expect the Fed will be sensitive about any possibility of the labor market tipping into a regime of job losses, and we believe it would be minded to “look through” tariff related inflation if need be.
