July CPI to Test Inflation Risks and Fed Easing Outlook

The upcoming release of the U.S. July Consumer Price Index (CPI) data is set to be a key economic indicator for the week ahead, with S&P Global highlighting its importance in gauging inflationary pressures and shaping expectations around future Federal Reserve policy [1]. The data will offer insights into whether recent developments—such as new tariff policies—have begun to accelerate price growth after the second-quarter CPI remained below 3.0% [1].

The market is particularly focused on the potential resurgence of inflation, with core CPI projected to rise to 3% in July [2]. Analysts have noted that import-heavy components of the CPI, such as apparel and household goods, showed significant increases in June, signaling the early impact of new tariffs [3]. These categories recorded their largest monthly increases since January 2022, suggesting that the full effect of the tariffs may not yet be fully reflected in the headline figures [3].

Despite the anticipation of rising inflation, market expectations for rate cuts by the Federal Reserve remain strong. This sentiment has been reinforced by recent weak labor market data, including the downward revision of nonfarm payrolls figures for May and June [3]. Investors are now pricing in three 25 basis point rate cuts by mid-2026 [3]. The recent confirmation of Stephen Miran’s nomination to the Board of Governors is seen as likely to support calls for a potential rate cut as early as September [3].

Meanwhile, the U.S. dollar has continued to depreciate, with the DXY index falling by roughly 1.0% since the previous week [3]. The decline has been driven by a combination of weak employment data, investor complacency toward tariff-related inflation risks, and expectations of Fed easing. Despite these headwinds, the S&P 500 remains close to its July 31 record high, closing just 1.4% below it, indicating a degree of optimism among investors [3].

In the foreign exchange market, the U.S. dollar is under downward pressure, especially against the Japanese yen and the British pound, as dovish central bank rhetoric and weak macroeconomic data continue to weigh on the greenback [3]. The upcoming CPI release will serve as a key test for whether this optimism is justified or if a more pronounced inflationary response could prompt a reassessment of the Fed’s easing trajectory.

Sources:

[1] S&P Global. Week Ahead Economic Preview (https://cdn.ihsmarkit.com/www/pdf/0825/Week-Ahead-25-08-08.pdf)

[2] Seeking Alpha. July CPI Preview: More Evidence Of Stagflation (https://seekingalpha.com/article/4810941-july-cpi-preview-more-evidence-of-stagflation)

[3] MUFG. FX Weekly – August 2025 (https://www.mufgresearch.com/fx/fx-weekly-08-august-2025/)