Inflation in the United States rose in July, government data released on Tuesday showed, as investors became more sensitive to the extent to which President Donald Trump’s tariffs are starting to affect consumer costs.
The latest data from the Bureau of Labor Statistics (BLS) showed that “core” inflation rose 0.3% from the previous month, surpassing a 0.2% increase in June and the biggest monthly jump in six months. Annual core prices rose 3.1% in July, higher than the 2.9% increase in June, indicating that rising prices for goods are no longer being offset by falling services inflation.
Before the report was released, economists had expected core CPI to rise 3.0% year-on-year and 0.3% month-on-month. Overall, the Consumer Price Index (CPI) rose 2.7% on an annualized basis in July, matching June’s pace and slightly below expectations for a 2.8% increase. On a monthly basis, CPI rose 0.2% from 0.3% in June, in line with expectations. The monthly decline was driven by lower gasoline prices and moderate food inflation.
Seema Shah, Global Chief Strategy Officer at Principal Asset Management, said that while core annual inflation returned to its highest level since February, the data was “not hot enough” to prevent the Fed from cutting rates in September. She acknowledged that there were early signs of the impact of tariffs on consumers, with footwear prices jumping 1.4% in July from the previous month, the biggest monthly increase since April 2021.
Other categories that saw gains included medical care, home furnishings and furnishings, recreation, and used vehicles. Airfares rose 4% after falling 0.1% in June, while lodging and communications were among the few major indexes that fell in July.
The report comes as ongoing trade negotiations have the potential to change the US effective tariff rate, which is currently estimated at around 18.6%, the highest since 1933, according to the Yale Budget Lab. The developments raise new questions about the direction of the Fed’s rate cuts.
After the report, investors raised their estimate to 90% probability that the Fed will cut rates by 0.25% at its September meeting, up from 57% last month. Traders still expect two more rate cuts by December. Shah warned that with inventory levels falling, the impact of tariffs on inflation could increase in the coming months, so price pressures could peak just as the Fed begins cutting rates.
Stock markets rose immediately after the report, while 10-year Treasury yields remained below 4.3%.
