July\u2019s inflation report went about as well as the Fed (and the White House) could have hoped for. <\/p>\n
The Consumer Price Index (CPI) summary released Tuesday reported inflation notched up 0.2% in July, that\u2019s down compared to the 0.3% increase in June. Over the past 12 months, this brings the headline inflation rate to 2.7%\u2014admittedly still comfortably ahead of the Federal Reserve\u2019s 2% target but the same level as it was in June.<\/p>\n
Shelter was the primary factor for the overall rise, the Bureau of Labor Statistics (BLS) said<\/a>, rising 0.2% in July. Meanwhile, key categories such as the food index were largely unchanged, with food at home falling 0.1% and food away from home rising 0.3%. Elsewhere, the energy index fell 1.1% while gasoline costs were also reduced by 2.2%.<\/p>\n Supporters of Trump 2.0 will use the relatively flat report as ammunition to urge U.S. Federal Reserve Jerome Powell to cut the base interest rate, arguing that tariffs are not (yet) proving as inflationary as many economists previously feared.<\/p>\n Indeed, President Trump wrote on Truth Social<\/a> moments after the data was released: \u201cJerome \u2018Too Late\u2019 Powell must NOW<\/a> lower the rate. Steve \u2018Manouychin\u2019 really gave me a \u2018beauty\u2019 when he pushed this loser. The damage he has done by always being Too Late is incalculable. Fortunately, the economy is sooo good that we\u2019ve blown through Powell and the complacent board.\u201d<\/p>\n When the White House announced its tariff regime, particularly following its \u201cLiberation Day\u201d announcements in April, analysts and investors feared the significant added costs to global trade would be passed to American consumers. Surveys indicate that this is the intention of the majority of businesses: To pass the increased levies on to the public, thus pushing up inflation.<\/p>\n But with various agreements with key partners now made, and delays with the likes of China to boot, economists are now beginning to wonder when (or if) the sharpest end of the tariff agenda will be felt. <\/p>\n The report is likely to have eased some of the friction members of the Federal Open Market Committee (FOMC) were readying themselves for. For many months, the FOMC had been warning it was mindful of the two sides of its mandate when making decisions about the base rate. <\/p>\n Those two sides are maximizing employment and keeping inflation to 2%. With a shocking and negative update on the labor market from earlier this month, a spiking inflation report for July would have put those two factors at even greater odds. <\/p>\n As it is, many analysts are seeing the inflation report as another tick in the box for a cut at the FOMC\u2019s next meeting in September. After all, they believe it means Powell and the FOMC can breathe easier about tariffs and give the economy and employment market a boost by lowering interest. <\/p>\n At the opening bell investors certainly seemed to think so: The S&P 500 was up 0.65%, the Dow<\/a> Jones up 0.6%, the Nasdaq<\/a> up 0.76%. <\/p>\n However, while headline inflation stayed below 3%, core inflation (excluding the often volatile food and energy categories) rose to 3.1% over the past 12 months. <\/p>\n Seema Shah, chief global strategist at Principal Asset Management, wrote in a note seen by Fortune that July inflation data isn\u2019t hot enough to \u201cderail the Fed from cutting rates in September. There is some sign of tariff pass through to consumer prices but, at this stage, it is not significant enough to ring alarm bells.\u201d <\/p>\n But Shah added that further cuts in 2025 are not a foregone conclusion: \u201cThe concern for the Fed is that with inventory run-down, the tariff-induced boost to inflation is likely to grow over the coming months, meaning that inflationary pressures are likely to pick up just as the Fed starts to resume rate cuts. Markets like today\u2019s inflation print as it means the Fed can lower rates unheeded next month \u2013 rate cut decisions in October, December and beyond may well be more complicated.\u201d<\/p>\n Don\u2019t count your cuts<\/p>\n While Powell has been fending off criticism from the White House, analysts are warning against baking in further and significant cuts for the remainder of the year. <\/p>\n The FOMC have their next meeting in September, followed by two more in October and December, and one member, Michelle Bowman, has already confirmed she would be open to such a trajectory. <\/p>\n Indeed, UBS\u2019s Ulrike Hoffmann-Burchardi, CIO Americas and global head of equities, wrote in a note to clients: \u201cWith overall inflation likely under control amid a slowing economy, our base case remains that the Fed will resume rate cuts at the September meeting and continue cutting for a total of 100bps.\u201d<\/p>\n