July inflation holds steady, masking emerging pressures from tariffs

Consumer prices rose at a steady pace in July, offering little relief to Federal Reserve policymakers as they weigh the next phase of rate cuts against stubborn underlying pressures.

The Consumer Price Index (CPI) climbed 0.2% from June — matching economist forecasts — while the year-over-year rate held at 2.7%. Core CPI, which strips out volatile food and energy prices, rose 0.3% on a month-over-month basis and 3.1% from a year earlier, meaning core inflation is at its highest level since February, reversing much of the spring slowdown. And both numbers are slightly hotter than the Fed would like.

From a market standpoint, the data is a mixed bag. On one hand, stock futures popped, bond yields dipped, and the CME FedWatch tool now pegs the likelihood of a September rate cut at close to 90%, up from about 80% before the report. On the other hand, sticky core inflation complicates the calculus: Sooner might be better, but premature rate cuts risk reigniting price pressures.

The pressure points are clear. Shelter costs — still the stickiest part of the inflation puzzle — rose 0.2% in July and accounted for the largest share of the monthly gain. Medical care services jumped 0.8%, and airline fares surged 4% ( a sharp reset after recent relief), partly offset by a 2.2% drop in gasoline prices and a broader 1.1% decline in energy. Food prices were flat, as grocery costs fell and restaurant prices edged higher.

The details are where things get interesting. Tariffs seem to be starting to appear in the CPI data — just not across the board quite yet. Components exposed to Trump-era tariffs — furniture and household wares — rose 0.7% in July, and toys climbed 0.2%. Appliances bucked that trend, dropping 0.9% after a 1.9% surge in June. These patterns reflect companies first working through inventory before passing along costs to consumers, and categories such as furniture, appliances, and toys appear to be the tariffs’ first battlegrounds.

Industry groups have echoed tariff-related concerns: Apparel and footwear associations have warned the Trump administration that tariffs alone won’t foster increased U.S. manufacturing, and companies such as Adidas and Crocs have already flagged price hikes in the pipeline.

“This print again suggests that the impact of tariffs on prices is more gradual than feared — even if it’s fairly pronounced in categories like furniture and AV equipment,” said Elyse Ausenbaugh, head of investment strategy at J.P Morgan Wealth Management. Economists had expected tariff-driven price pressures to be more pronounced by now, but importers have been slow to pass costs along as they work through old inventory. That lag won’t last, according to Goldman Sachs, which sees the share of tariff costs hitting consumers climbing from 22% earlier this year to roughly two-thirds by October.

“As the battle continues over whether or not tariffs will lead to persistent inflation, this month’s report did nothing to convince anyone,” said Chris Zaccarelli, chief investment officer for Northlight Management.

The print lands in the middle of a political and economic crosscurrent. July’s CPI report is the first big economic data to emerge since President Donald Trump fired BLS Commissioner Erika McEntarfer after July’s disappointing jobs figures — claiming without any evidence that they were “rigged” — stunning economists who warned the move could undermine data credibility. The president has since tapped Heritage economist E.J. Antoni — a BLS critic tied to Project 2025 — to lead the agency, which some worry may politicize data the Fed and markets rely on.

The White House has downplayed the inflationary hit — with Trump’s latest Fed pick, Council of Economic Advisers chair Stephen Miran, insisting that foreign suppliers are eating the cost — but July’s data could be read as a first referendum on that claim.

For the Fed, the report is the first of two CPI readings before its September meeting. Chair Jerome Powell and his colleagues have signaled they want “greater confidence” that inflation is on a sustainable path to 2% before easing more aggressively, and the persistence in core services will give them little reason to rush.

“While one data point does not make a trend, two consecutive months of higher 12-month inflation will make it difficult for the Fed to justify a rate cut at their September 17 meeting,” said Larry Tentarelli, the chief technical strategist for Blue Chip Daily Trend Report. He added that the data “puts the Fed in the predicament of trying to balance a possibly weaker labor market vs. two months in a row of rising inflation and above-average CPI.” Bill Adams, the chief economist for Comerica Bank, called July’s CPI print “a pebble on the scales against a rate cut in September”; he said the next jobs report will have more of an impact on the Fed.

July’s CPI was less of a curveball than it was a reminder: The disinflation streak has stalled, core prices are creeping higher, and tariffs are starting to seep into the data. Energy is still bailing out the headline number, but sticky services and tariff-prone goods are keeping the Fed’s inflation headache alive. With just one more CPI print before September’s meeting, Powell now faces a data path that’s narrowing — and a political climate making every number just a little bit harder to read.