Muted CPI Sparkles: Markets Shine in Best Day Since November

The Consumer Price Index (CPI) report for July 2025 delivered a muted reading, with the headline number coming in at 0.2% and the core reading also at 0.2%. This news, coupled with some better-than-expected wholesale inflation data, spurred optimism in the markets, leading to the best day for U.S. stocks since November 2024. The Dow Jones Industrial Average (DJIA) surged by nearly 700 points in morning trading, while the S&P 500 Index (SPX) rose by 1.69%, and the Nasdaq Composite (IXIC) climbed by 2%.

The CPI measures price changes across commonly purchased goods and services, with energy prices and food prices being two of the most volatile categories. In July, energy prices, particularly gas and fuel costs, accounted for 40% of the overall monthly increase. Food prices also remained elevated due to pressures from weather and disease on key staples such as meat and eggs. However, excluding these volatile categories, the core CPI gauge slowed for the first time in months, rising just 0.2% from June and easing to 3.2% from 3.3% for the year.

The muted CPI report led to a decrease in market-implied odds of a 0.50%-point cut in September, from 53% to 37.5%. This suggests that the Federal Reserve (the Fed) is likely to maintain its current stance on interest rates in the near term, as the latest report did not disrupt its chosen inflation narrative of "making progress but we're not quite there yet." The Fed is more likely to want to start with a 0.25% cut rather than a 0.50% cut, as it prefers a more gradual approach to monetary policy. However, the final decision will depend on the data over the next month.