Briefing at a Glance

  • Data released by the U.S. Department of Labor on Tuesday showed that, excluding volatile food and energy prices, core inflation rose to 3.1% year-over-year in July, up from 2.9% in June, driven mainly by a rebound in service prices such as transportation and healthcare.
  • Overall inflation remained close to the Federal Reserve's 2% long-term target, rising 2.7% year-over-year in July, unchanged from June. The Labor Department stated thathousing prices rose 3.7% year-over-yearand were the main driver of the overall inflation increase.
  • Brian Coulton, chief economist at Fitch Ratings, said in an email: "The July CPI was disappointing, following improvements in May and June." However, he also noted that with slowing economic growth, weakening consumer spending, and cooling hiring over the past three months, "the likelihood of a rate cut in September has increased." The Federal Reserve policy meeting Coulton referred to is scheduled for September 16-17.

In-Depth Analysis

Despite the higher-than-expected inflation data, interest rate futures traders on Tuesday maintained their bets that the Federal Reserve will lower the federal funds rate from its current target range of 4.25%-4.5% next month.

According to theCME FedWatch tool, traders raised the probability of a 25-basis-point rate cut in September to 94%, up from 86% previously.

Weakness in the labor market has already prompted two Federal Reserve governors to oppose the decision to hold rates steady for a fifth consecutive meeting last month, advocating for a 25-basis-point cut.

Other Fed officials have not yet supported lowering borrowing costs, but have recently expressed concerns about cooling labor market and signs of weakening consumer spending, which accounts for about 70% of economic growth.

Richmond Fed President Tom Barkin said in a speech on Tuesday: "Real consumer spending has been nearly stagnant in recent months. Consumers, having experienced four years of above-target inflation, are tired of high prices and are trading down."

Barkin also noted that U.S. GDP growth has slowed from 2.5% in 2024 to an annualized rate of 1.2% in the first half of this year; the job market has weakened this summer, with average monthly job gains falling to 35,000 over the last three months, down from 127,000 between February and April.

Additionally, Barkin mentioned that "businesses plan to raise prices further amid tariff increases," and consumers "are more willing to delay purchases when prices rise."

However, he believes the current labor market and inflation outlook are too uncertain to prompt the Fed to adjust policy.

"We could see inflationary pressures or unemployment pressures, but the balance between the two remains unclear," Barkin said.

Kansas City Fed President Jeffrey Schmidsupports maintaining current monetary policy, stating that "inflation is still too high, so policy should remain moderately restrictive."

Schmid also mentioned that, regarding the Fed's full employment mandate, the job market should not raise excessive concerns. Despite slower job growth in recent months, "broader indicators show the labor market is in balance."

"The unemployment rate remains low, wage growth is solid, and the ratio of job openings to unemployed workers is about 1 to 1, a match indicating the labor market is near balance," Schmid said.

"Given the economy still has momentum, business optimism is rising, and inflation remains above target, maintaining a moderately restrictive monetary policy stance is appropriate at this time," he added.