U.S. CPI Edged Up 0.1% in July, Easing Pressure on Federal Reserve

U.S. consumer prices advanced by a modest 0.1% in July, aligning with analyst expectations and potentially reducing the urgency for the Federal Reserve to raise interest rates at its upcoming September meeting. This monthly increase followed a 0.4% decline in June. Overall, the Consumer Price Index (CPI)'s year-over-year increase currently stands at 3.4%. While this figure is higher than the 2.7% observed for the twelve months ending July 2025, much of this acceleration is attributed to a surge in energy prices in the wake of the Iran War.

Energy prices saw a 1.5% decline in July, although they remain 14.7% higher than a year ago. Food prices, conversely, rose by 0.1%. The "core" CPI, which strips out the volatile food and energy components, climbed 0.2% in July, also matching consensus forecasts. Annually, core prices have increased by 2.5%, a deceleration from the 3.1% gain recorded for the twelve months ending July 2025. Nonetheless, inflation continues to hover above the Federal Reserve's 2.0% target across various measures.

Housing rents emerged as a significant contributor to core inflation once again in July, rising by 0.3%. This includes both rents paid by tenants and the imputed rental value for homeowners. Partially offsetting this increase were declines in categories such as hotels (-3.3%), financial services (-1.3%), prescription drugs (-0.8%), and motor vehicle insurance (-0.3%). Meanwhile, "Supercore" prices—a refined measure used by the Federal Reserve that excludes food, energy, other goods, and housing—increased by 0.2% in July. Components driving this rise included airline fares (+2.2%), education and communication services (+0.5%), and medical care (+0.6%).

A notable concern from the report was the performance of real average hourly earnings, which, after adjusting for inflation, declined by 0.1% in July. This extends a trend that has seen these earnings fall by 0.2% over the past year, indicating that wages are losing ground against the rising cost of living. While this data point may temper the Federal Reserve's inclination for further rate hikes, the ongoing geopolitical landscape suggests that inflation could remain volatile in the near term. Longer-term inflationary trends, particularly after the resolution of geopolitical conflicts, could be influenced by broader monetary supply metrics, which some analysts suggest might lead to a faster-than-expected decline in inflation.

Key terms:

1. Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

2. Core CPI: An inflation measure that excludes certain items, such as food and energy, from the overall CPI because their prices are too volatile. It is often used by policymakers to gauge underlying inflation trends.

3. Real Average Hourly Earnings: The average amount of money earned per hour by workers, adjusted for inflation. This measure indicates the actual purchasing power of wages over time.

Source: This article is adapted from First Trust Portfolios' Data Watch commentary on this data release. The original is available at ftportfolios.com.