Consumer Price Index & More

Bottom Line:

Headline inflation held steady in July, largely due to declines in energy prices, while core inflation came in higher than expected, driven by increases in airline fares and used vehicles. Services inflation remained elevated at 3.8% year-over-year, but the main contributor to the rise in inflation in July was core goods, which outpaced the dampening effects of lower energy and shelter costs. Encouragingly, food prices remained flat in July, suggesting that tariffs have yet to impact this category. However, it's important to note that the most significant tariff hikes took effect on August 7, meaning any potential inflationary effects are unlikely to appear until next month’s data at the earliest. Overall, the report was positive and may boost the likelihood of the Federal Reserve cutting rates twice through year-end, with at least two additional cuts possible in 2026.

Summary:

The headline Consumer Price Index (CPI) increased in line with expectations, up 0.2% month-on-month, according to the Bureau of Labor Statistics. On a year-on-year basis, the CPI remained unchanged at 2.7%. The core CPI increased as we expected by 0.3% month-over-month and 3.1% year-over-year.

Food prices remained unchanged as food at home decreased by 0.1% while food away from home increased by 0.3%. Energy prices declined by 1.1% as energy commodities decreased by 9.0%, driven by a 9.5% decrease in gasoline prices and a 2.9% decrease in fuel oil prices. Energy services also softened by 0.3% as both electricity and utility (piped) gas services declined by 0.1% and 0.9%, respectively.

New vehicle prices remained flat in July, while used car and truck prices were up by 0.5%. Apparel prices and medical care commodities were both up by 0.1%. Services less energy services prices were up 0.4% as prices of transportation and medical care services both increased by 0.8% during the month.

Observations:

Shelter prices remained stable and increased 0.2% during the month, as owners' equivalent rent remained well-anchored with the fourth consecutive monthly increase of 0.3%. In contrast, the 1.1% decline in energy prices helped prevent headline inflation from rising on a year-over-year basis, acting as a key offset to upward pressure in other categories.