US July inflation flat at 2.7%; despite spike in core inflation

14 Aug 2025 , 10:52 AM

JULY US CONSUMER INFLATION FLAT AT 2.7%

Between May and June 2025, the US consumer headline inflation surged 40 bps to 2.7% on the back of the tariff impact. However, with the tariffs getting increasingly back-ended or toned down, the incremental tariff impact in July was limited. This led to flat consumer inflation for July 2025 at 2.7%. However, that is not to say that reciprocal tariffs have peaked out, because the impact of the 50% tariffs that the US has imposed on India will start to take effect in the next few months. Meanwhile, global markets are watching; fingers crossed.

CORE INFLATION SURGE OFFSET BY FOOD AND ENERGY

Tariff impact led to hardening of core inflation; but food and energy sobered in July 2025.

Inflation Basket Category	Jul 2025 (YOY)	Jun 2025 (YOY)	Inflation Basket Category	Jul 2025 (YOY)	Jun 2025 (YOY)
Food Inflation	2.90%	3.00%	Core Inflation	3.10%	2.90%
Food at home	2.20%	2.40%	Commodities less food and energy	1.20%	0.70%
·          Cereals and bakery products	1.00%	0.90%	·          Apparel	-0.20%	-0.50%
·          Meats, poultry, fish, and eggs	5.20%	5.60%	·          New vehicles	0.40%	0.20%
·          Dairy and related products	1.50%	0.90%	·          Used cars and trucks	4.80%	2.80%
·          Fruits and vegetables	0.20%	0.70%	·          Medical care commodities	0.10%	0.20%
·          Non-alcoholic beverages	3.60%	4.40%	·          Alcoholic beverages	1.40%	1.40%
·          Other food at home	1.20%	1.30%	·          Tobacco and smoking products	6.50%	6.30%
Food away from home	3.90%	3.80%	Services less energy services	3.60%	3.60%
·          Full service meals and snacks	4.40%	4.00%	Shelter	3.70%	3.80%
·          Limited service meals	3.30%	3.50%	·          Rent of primary residence	3.50%	3.80%
Energy Inflation	-1.60%	-0.80%	·          Owners’ equivalent rent	4.10%	4.20%
Energy commodities	-9.00%	-7.90%	Medical Care Services	4.30%	3.40%
·          Fuel oil	-2.90%	-4.70%	·          Physician Services	3.10%	3.00%
·          Gasoline (all types)	-9.50%	-8.30%	·          Hospital Services	5.80%	4.20%
Energy services	7.20%	7.50%	Transport Services	3.50%	3.40%
·          Electricity	5.50%	5.80%	·          Motor vehicle Maintenance	6.50%	5.20%
·          Natural gas (piped)	13.80%	14.20%	·          Motor vehicle insurance	5.30%	6.10%
Headline Consumer Inflation	2.70%	2.70%	·          Airline Fare	0.70%	-3.50%

Data Source: US Bureau of Labor Statistics

CPI inflation above sets the tone for PCE inflation; which influences Fed rate decisions.

• July food inflation was down 10 bps at 2.9%. Upward pressure came from cereals, dairy products, and full service meals; offset by fall in meat, fruits, vegetables, and beverages.
• Energy inflation in July 2025 softened 80 bps to -1.6%. Upward pressure came from spike in gasoline; offset by fall in fuel oil, electricity, and piped natural gas.
• July Core inflation up 20 bps at 3.1%. Downward pressure from motor insurance and rent; offset by spike in used cars, hospital services, auto maintenance, and air fares.

The rise in core inflation has been largely offset by a fall in food inflation as well as softening of energy inflation. Round 2 of reciprocal tariffs are yet to show up on prices.

JULY 2025 MOM INFLATION SOBERS TO 0.2%

Here is the high frequency month-on-month (MOM) inflation for last 6 months.

Month	Food (MOM)	Energy (MOM)	Core (MOM)	Headline (MOM)
Feb 2025	0.2%	0.2%	0.2%	0.2%
Mar 2025	0.4%	(2.4)%	0.1%	(0.1)%
Apr 2025	(0.1)%	0.7%	0.2%	0.2%
May 2025	0.3%	-1.0%	0.1%	0.1%
June 2025	0.3%	0.9%	0.2%	0.3%
July 2025	0.0%	-1.1%	0.3%	0.2%

Data Source: US BLS (negative figures in brackets)

High frequency inflationary trend is almost similar to the trend we see on the yoy inflation. The upward pressure from core inflation has been largely offset by the downward pressure on fuel inflation and food inflation in the month of July 2025. Oil saw deep price cuts.

CME FEDWATCH – JEROME POWELL NOT BUYING RATE  CUT ARGUMENT

The July Fed meet again saw status quo on rates as Jerome Powell opted to hold rates in the range of 4.25%-4.50%. This is despite 2 senior FOMC members; Chris Waller and Michelle Bowman, giving a dissent vote supporting a 25 bps rate cut. Here is how the CME Fedwatch probabilities (based on implied Fed Futures trades) look.

Fed Meet	200-225	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450
Sep-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	0.1%	99.9%	Nil
Oct-25	Nil	Nil	Nil	Nil	Nil	Nil	0.1%	68.4%	31.6%	Nil
Dec-25	Nil	Nil	Nil	Nil	Nil	Nil	58.5%	36.9%	4.6%	Nil
Jun-26	Nil	Nil	2.1%	13.1%	29.8%	32.4%	17.7%	4.5%	0.4%	Nil
Dec-26	1.2%	5.1%	14.0%	24.5%	27.2%	18.7%	7.6%	1.6%	0.1%	Nil

Data source: CME Fedwatch

The dissent votes in the last meeting has made the CME Fedwatch more aggressive. It now expects rate cuts to be front-loaded in 2025 itself.

• The first rate cut of 2025 has a high 99.9% probability in Sep-25. By October, there are high expectations of 2 rate cuts of 25 bps each with probability of 68.5%.
• By Dec-25, probability of 75 bps rate cut remains fairly high at 58.5%, with 50 bps almost a done deal. By end of 2025 it looks like a certain 50 bps cut and possible 75 bps cut.
• CME Fedwatch has assigned a high 90.3% probability for 2 more rate cuts in 2026, taking rates to 3.25%-3.50% range. There is 72% probability of 125 bps rate cut by Dec-26.

For now, September 2025 rate cut of 25 bps looks certain, with 2 more rate cuts likely in 2025. Overall, we may be staring at 3 rate cuts in 2025 and 2 more rate cuts in 2026. For that to happen, the FOMC needs to buy the dovish story!