Underlying U.S. inflation firmed in July as core CPI rose 0.3% month over month, the fastest pace since early 2025, with services leading the advance while goods inflation stayed subdued. Markets initially cheered the in-line print, sending Treasuries higher and equities up before gains faded, and traders leaned further toward a September Fed cut amid a softer labor backdrop.
The composition told the story: ex-energy services accelerated—airfares posted their biggest jump in three years, and medical care and recreation rose—while core goods ticked up modestly. Some tariff-exposed categories (toys, sporting goods, household furnishings) increased but at a slower clip than June, and used-car prices rebounded. “Inflation was broadly in line with expectations as tariffs continue to be largely absorbed within profit margins,” said ING’s James Knightley, arguing this gives the Fed room to respond to weaker jobs.
Market Overview:- Core CPI +0.3% m/m; services reaccelerate as goods remain tame
- Airfares surge; medical care and recreation firm; used cars rebound
- Rates markets tilt toward a September cut as labor data softens
- Shelter +0.2% m/m for a second month; hotel prices ease
- “Supercore” (services ex housing & energy) +0.5%, one of 2025’s strongest
- Tariff pass-through mixed and slower than feared; margins absorbing pressure
- Producer prices will shape the core PCE read later this month
- Retail sales and sentiment Friday test consumer resilience
- Policy path hinges on whether services stickiness persists into Q4
- Services-Driven Inflation is Manageable: Core CPI’s 0.3% monthly gain and the spike in “supercore” services (ex-housing and energy) can be viewed as a healthy rebalancing—evidence consumers are still spending on experiences as goods inflation stays tame. With shelter growth softening and hotels easing, the sticky inflation narrative is not universal across all components.
- Tariffs Not Derailing Profit Margins: Inflation in tariff-exposed categories is being absorbed by corporate profit margins, not fully passed on to consumers. This means pricing power remains with businesses, and the feared inflation pass-through from trade policy has been muted so far. The Fed can remain flexible while watching for louder signs of consumer stress or margin compression.
- Labor Markets Support Dovish Pivot: A softer labor backdrop and rising real earnings (+1.2% YoY) give the Fed cover to lean dovish if other data (producer prices, retail sales) point to moderating core inflation. Equity and bond market reactions show investors still trust the overall disinflation trend is in play—giving room for a potential September rate cut if jobs and spending soften further.
- Actionable Play for Sales and Finance Teams: Use this window to promote value-added products and services to corporate customers (especially in TMT, travel, and healthcare) who are still defending margins. For portfolio managers, tilt toward sectors with pricing power in services, but hedge exposure to rate-sensitive areas as Fed policy direction remains fluid.
- Services Stickiness Threatens 2% Target: The reacceleration of core services inflation—especially supercore at +0.5%—complicates the glide path to the Fed’s 2% target. Persistent price gains in airfares, recreation, and medical care risk baking in inflation expectations, making monetary easing risky if stickiness persists into Q4.
- September Rate Cut Still Uncertain: While markets initially cheered the in-line CPI, Bloomberg highlights that a firm July CPI likely translates into a hot core PCE read later this month. This, combined with lingering services pressure, could force the Fed to delay cuts even if labor data weakens, disappointing bulls and exposing markets to a hawkish surprise.
- Tariffs Could Yet Bite: Although margin absorption has cushioned inflation from tariffs so far, any further escalation or supply chain shocks could squeeze profits and force businesses to finally pass higher costs on to consumers—delaying or derailing the disinflation process.
- Action Plan for CXOs and Advisors: Redouble focus on cost controls, scenario-model price hikes, and improve monitoring of real-time wage and input cost trends. Encourage clients to remain cautious on discretionary spending exposure and stress-test portfolios against a “higher for longer” interest rate reality if Q3 inflation print doesn’t cool meaningfully.
For policymakers, the re-acceleration in services complicates the glide path to 2% even as core goods disinflation lingers. Bloomberg Economics warned a firm July CPI likely translates to an even hotter core PCE, leaving a September cut “far from assured” unless incoming data cools visibly.
Beyond the headline, real average hourly earnings rose 1.2% y/y, a modest cushion for consumers facing higher services costs. With tariff settings still in flux and new BLS leadership under heightened scrutiny, the next few prints—PPI, retail sales, and core PCE—will determine whether the Fed can pivot from patience to easing without rekindling inflation.
