July CPI Eases Pressure on Fed as Inflation Slows to 2.7% Year-Over-Year

Jerome Powell’s path to easing monetary policy has become clearer after July’s inflation report showed signs of moderation, easing some of the pressure on the Federal Reserve’s dual mandate of price stability and maximum employment. The Consumer Price Index (CPI) increased by 0.2% in July, lower than the 0.3% rise in June, and the year-over-year headline inflation rate stood at 2.7%, unchanged from the previous month [1]. While this remains above the Fed’s 2% target, it is a more manageable trajectory than feared, particularly with the energy index dropping 1.1% and gasoline costs falling 2.2% [2].

Shelter costs remained the primary contributor to inflation, rising 0.2% in the month. Food prices were broadly stable, with food at home declining slightly and food away from home rising marginally. Core inflation, which strips out food and energy, edged up to 3.1% on a year-over-year basis [3]. While still elevated, this figure did not trigger immediate alarm and supported expectations for a rate cut in September.

Analysts suggested that the data aligns with the Fed’s cautious optimism. Seema Shah, chief global strategist at Principal Asset Management, noted that the inflation print was not hot enough to derail rate cuts in September, though she warned that further easing in 2025 may be limited by sticky service costs and potential inflationary pressures from tariffs [4]. The impact of Trump’s aggressive tariff agenda had been a key concern, as many businesses had signaled intent to pass costs on to consumers. However, with delays in implementation and agreements with key trade partners, the immediate inflationary blow may have been softened [5].

President Trump quickly seized on the report, urging Powell to act, while market participants responded positively. The S&P 500, Dow Jones, and Nasdaq all opened higher, reflecting investor optimism about a potential rate cut [6]. UBS’s Ulrike Hoffmann-Burchardi and others expect the Fed to resume rate cuts in September and continue through the year, citing slowing inflation and a weakening labor market [7]. Yet some analysts, including Oxford Economics’ Michael Pearce and Comerica Bank’s Bill Adams, caution against assuming a September cut is certain. The July report showed a rise in core inflation and lingering risks from sticky service prices, which may lead the Fed to delay action until more data is available [8].

The debate centers on how much weight the FOMC will place on the July data versus the upcoming jobs report, with Powell and his colleagues likely to remain cautious. While the inflation report has eased some concerns, the Fed’s focus will remain on balancing employment and price stability, particularly as the inflationary effects of tariffs may still materialize in the coming months [9].

[1] https://fortune.com/2025/08/12/jerome-powell-fed-rate-cut-july-cpi-inflation-unemployment/?itm_source=parsely-api