Markets Rise as Inflation Better than Feared

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The July Consumer Price Index (CPI) release came in largely as expected but tilted slightly softer than feared, sparking a risk-on reaction in equity markets while leaving bond yields little changed. Headline CPI rose 0.2% month-over-month, in line with consensus, while the year-over-year rate eased to 2.7% from 2.7% in June, a touch below the 2.8% expected. Core CPI, which strips out food and energy, increased 0.3% on the month, matching estimates, and climbed 3.1% year-over-year, just above the 3.0% forecast. The slight upside surprise in the core annual figure was offset by the reassuring headline print, keeping the data in a “good enough” zone for risk assets.

One of the most notable themes from the report was the divergence between goods and services inflation. Goods prices remained under control, helped by declines in key categories like gasoline (-2.2% m/m, -9.5% y/y) and fuel oil (-2.9% y/y), as well as flat new vehicle prices and only modest gains in used cars (+0.5% m/m). Services inflation, by contrast, stayed sticky. Shelter rose 0.2% on the month, with owners’ equivalent rent up 0.3%, while medical care (+0.7%) and airline fares (+4.0%) posted meaningful gains. Supercore CPI—which strips out shelter from services to gauge the underlying trend—accelerated to 0.48% m/m from 0.21%, lifting the year-over-year rate to 3.21% from 3.02%, underscoring that price pressures in labor-intensive sectors remain persistent.

The biggest upward drivers in July’s report came from categories like medical care services, personal care (+0.4%), recreation (+0.4%), and transportation services. Airline fares’ 4% jump was a standout, reversing the prior month’s dip, while motor vehicle insurance continued its run of outsized annual gains (+5.3% y/y). On the goods side, household furnishings (+0.4%) and used cars were incremental positives for inflation. By contrast, disinflationary forces were strongest in energy, where declines in gasoline, natural gas (-0.9% m/m, though +13.8% y/y), and electricity (-0.1% m/m) collectively pulled the energy index down 1.1% on the month. Food prices were flat overall, with food at home down 0.1% and modest gains in food away from home (+0.3%) offset by declines in categories like cereals (-0.2%) and nonalcoholic beverages (-0.5%).

The “stickiness” of services inflation will keep the Fed’s attention, even if headline numbers continue to trend toward the 2% target. Shelter’s 3.7% annual rise remains a large contributor to the core basket, and the uptick in supercore suggests some underlying momentum that will be harder to unwind. Still, the broader picture shows that goods disinflation is holding and that energy is providing an ongoing offset, cushioning the overall price level from services-driven upside pressure.

Financial markets took the report as a modest win. Equities pushed higher in early trading, with the S&P 500 and Nasdaq both gaining as traders leaned into the idea that inflation is not reaccelerating meaningfully despite resilient services categories. The bond market reaction was muted—Treasury yields stayed little changed—as the data broadly matched expectations, keeping rate-cut bets steady. Fed funds futures now price roughly an 85% probability of a September cut, with markets still penciling in at least two moves by year-end.

Attention will quickly turn to the day’s two scheduled Federal Reserve speakers—Governor Michelle Bowman and Richmond Fed President Thomas Barkin. Bowman has already signaled support for a cut at the most recent meeting, so her remarks are unlikely to surprise markets. Barkin, however, has been more circumspect in the past. Should he join Bowman, Waller, and Daly in explicitly advocating for rate reductions, it could be interpreted as a growing groundswell within the Fed in favor of easing, potentially adding momentum to the post-CPI rally.

In the current market context, the July CPI print keeps the Fed on track to move toward a rate cut without triggering fears of an inflation flare-up. The softer-than-expected headline number, alongside stable core readings, reinforces the narrative that inflation is cooling in aggregate, even if certain services remain stubborn. For traders, the key takeaway is that today’s data reduces near-term policy uncertainty and supports risk appetite—at least until the next major economic release challenges that view. With rate-cut odds already high and dovish Fed commentary potentially on tap later today, markets may have scope to extend gains in the short term, even if sticky services inflation means the longer-term disinflation path remains uneven.

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