US July CPI a Mixed Bag, Traders Pile Into Bets on a September Rate Cut

Before the US market opened last night, the Bureau of Labor Statistics released July inflation data that drew plenty of market attention. Headline CPI (not seasonally adjusted) held steady at 2.7% year-on-year, below the 2.8% forecast. However, core CPI climbed to 3.1%—a five-month high—beating expectations of 3.0%. On a monthly basis, core CPI rose 0.3%, the fastest pace since January. This split performance highlights the complexity of the inflation picture and adds new challenges for the Fed’s upcoming policy decisions.

Source: U.S. Bureau Of Labor Statistics

Energy and Food Prices Fall, But Services Inflation Surges

A closer look shows a clear structural pattern: energy and food prices are easing, but services inflation is still running hot. The Fed’s closely watched “supercore services” gauge—excluding housing, goods, food, and energy—jumped 0.48% in July from the prior month, the largest increase since January. Airline fares soared 4%, the biggest rise in over three years, while dental services spiked 2.6%, the highest on record. These figures point to stubborn, and even accelerating, inflation pressures in services.

There are deeper forces behind this. The labor market, while cooling a bit, is still relatively tight, keeping service-sector wage costs elevated. Pandemic-era excess savings continue to support consumption—especially in services. Housing costs are also still feeding into CPI with a lag; even though the housing market has cooled, the effect on inflation will take time to fade.

One more potential risk hasn’t fully shown up yet: the impact of Trump-era tariff hikes. Goods categories that rely heavily on imports—like autos and electronics—could see price spikes as these tariffs filter through. With new car models rolling out in the fall and dealer inventories clearing, sticker prices could climb further.

Cooling Labor Market Meets Sticky Inflation—A Policy Dilemma for the Fed

This mixed inflation picture leaves the Fed in a bind. On one hand, core inflation remains above target, especially with sticky services prices, so cutting rates too soon risks reigniting price pressures. On the other hand, the labor market is showing signs of cooling: May and June job gains were sharply revised down, and GDP growth has slowed. That gives policymakers a case for easing.

Market expectations for a September cut have shifted sharply. CME’s FedWatch tool now puts the odds of a 25 bp cut at 95%, and some officials have even floated the idea of a larger 50 bp move. Treasury Secretary Bessent said publicly that, given the latest jobs data, the Fed “could have started cutting in June or July.” This growing dovish tilt underscores mounting concerns about the economic outlook.

Source: CME group

Historically, the current inflation path has echoes of the 1970s–80s, when prices plateaued after surging and only broke lower when growth slowed more decisively. That suggests it may take some economic pain to firmly bring inflation back to target. The Fed’s challenge is to balance inflation control with growth support—no easy task.

Possible Inflation Path Ahead

Looking forward, several themes may define the inflation trend:

1. Goods vs. services divergence could persist, but tariffs may shift the balance.

2. Housing’s contribution to CPI will likely fade, but the timing is uncertain.

3. Labor market conditions will be critical—slower wage growth is key for easing service inflation.

For China, US inflation and Fed policy will matter a lot. If the Fed starts cutting rates on schedule, the dollar may weaken, easing pressure on the yuan and giving China’s central bank more room to maneuver. But US economic resilience will also shape global demand and, by extension, China’s exports. Investors should watch upcoming inflation prints and Fed signals closely.

Markets Price in September Cut, Nasdaq and S&P Hit New Highs

With headline CPI coming in softer than expected, all three major indexes gained over 1%. The Nasdaq $NASDAQ(.IXIC)$ rose 1.39% and the S&P 500 $S&P 500(.SPX)$ climbed 1.13%, both setting new records. The Dow $Dow Jones(.DJI)$ added 1.10%. In crypto, Bitcoin $iShares Bitcoin Trust ETF(IBIT)$ lagged Ethereum and remained capped below $120,000, while Ethereum $iShares Ethereum Trust ETF(ETHA)$ broke above 4,600 to hit a fresh yearly high.

Invesight Viewpoint

July CPI paints a complicated picture—sticky core inflation alongside mild headline numbers, potential upside risks alongside slowing growth signs. That makes the Fed’s September meeting pivotal. Whatever the decision, the interplay between tariffs and inflation will remain a key global market driver for some time.