For a market braced for an inflation surprise, July’s CPI report provided none of the sort. Core CPI rose 0.2% and headline CPI increased 0.1%, both matching expectations. On a year-over-year basis, core inflation stands at 2.5% while headline CPI is running at 3.4%.
Markets took the report in stride, with Treasury yields moving lower and investors trimming the odds of a September rate hike from roughly a coin flip to less than 40%. Futures implied policy rates fell after the inflation release, lowering market expectations for additional rate hikes in 2026. The data does not settle the debate inside the Fed, but it does weaken the case for an imminent tightening move, particularly as labor market data has softened in recent months. Inflation remains above the Fed’s 2% target and elevated energy prices continue to pose a risk, but for now inflation appears to be moving sideways to lower rather than showing signs of a renewed upswing.
