July CPI: Inflation continued to rise as tariffs push consumer prices higher

Inflation increased in July and moved further away from the Federal Reserve’s target rate as central bank policymakers assess the health of the economy amid the president’s calls for interest rate cuts.

The Bureau of Labor Statistics on Tuesday said that the consumer price index (CPI) – a broad measure of how much everyday goods like gasoline, groceries and rent cost – rose 0.2% in July compared with last month, while it was up 2.7% from a year ago. 

The monthly figure was in line with the estimate of economists polled by LSEG, while headline was slightly cooler than the 2.8% expected.

So-called core prices, which exclude volatile measurements of gasoline and food to better assess price growth trends, were up 0.3% from the prior month and 3.1% from a year ago. The annual core figure was hotter than economists’ expectations of 3%, while the monthly figure was in line with the estimate.

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High inflation has created severe financial pressures in recent years for most U.S. households, which are forced to pay more for everyday necessities like food and rent. Price hikes are particularly difficult for lower-income Americans, because they tend to spend more of their already-stretched paychecks on necessities and have less flexibility to save money.

Food prices were flat compared with a month ago, as the food at home index decreased 0.1% and the food away from home index rose 0.3%. Over the last year, the overall food index is up 2.9%, with food at home up 2.2% and food away from home at 3.9%. 

Egg prices declined 3.4% compared with last month, continuing a cooling trend after prices rose rapidly last year due to an avian flu outbreak, as prices are still 16.4% higher than a year ago. The meats, poultry, and fish index was up 0.7% in July and is 4.6% higher than a year ago. The dairy index also rose 0.7% last month and is up 1.5% from last year. The index for fruits and vegetables was unchanged on a monthly basis and is up just 0.2% since last year.

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The food at home index declined 0.2% for the month and is up 2.2% from last year. (Robert Nickelsberg/Getty Images / Getty Images)

Energy prices decreased 1.1% in July and are down 1.6% compared with a year ago. Gasoline prices were down 2.2% last month and have declined 9.5% from last year.

Housing prices ticked 0.2% higher on a monthly basis in July and are up 3.7% compared with last year. The shelter index was the main driver of the increase in the all-items index.

Transportation costs rose 0.8% in July and are 3.5% higher than a year ago. Air fares were up 4% in July and are just 0.7% higher than a year ago. Auto maintenance and repair costs increased 1% last month and are up 6.5% from last year.

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The July CPI report comes as the Federal Reserve is weighing a potential rate at its next meeting in September, with inflation remaining well above its 2% target rate and the labor market showing signs of softness after the July jobs report showed weaker-than-expected jobs growth and revised employment in May and June downward by 258,000 jobs.

Fed Chair Jerome Powell said at a press conference earlier this year that if the central bank’s dual mandate goals of maximum employment and 2% longer-run inflation were in tension, the Fed’s policymakers would likely orient policy around supporting whichever objective was further away from target.

Federal Reserve Chair Jerome Powell has said the central bank will monitor economic data as it weighs rate cuts. (Alex Wong/Getty Images / Getty Images)

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“Inflation is on the rise, but it didn’t increase as much as some people feared. In the short term, markets will embrace these numbers because they should allow the Fed to focus on labor-market weakness and keep a September rate cut on the table,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “Longer term, we likely haven’t seen the end of rising prices as tariffs continue to work their way through the economy.”

“Investors must come to grips with inflation above the Fed’s target amid a backdrop of slower growth, setting things up for stagflation-lite,” said Jeffrey Roach, chief economist for LPL Financial. “Despite the increase in core inflation, we expect the Fed to cut rates next month as they pay closer attention to the weakening labor market.”

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Following July’s inflation report, markets saw a higher probability of the Fed cutting rates at next month’s meeting. The likelihood of a 25-basis-point rate cut in September rose from 85.9% yesterday to 94.4% today, according to the CME FedWatch tool.