Federal Reserve policymakers are likely to feel little fresh urgency to raise interest rates in September after data released Wednesday showed inflation cooled on a year-over-year basis for a second straight month, according to Reuters. Even so, officials say they're taking little comfort that monetary policy is tight enough to keep the easing trend going.
What the July CPI Report Showed
The Consumer Price Index rose 3.4% in the 12 months through July, down from 3.5% in June, the Bureau of Labor Statistics reported — a result in line with economists' expectations. Core CPI, which strips out volatile food and energy prices, increased 2.5% year-over-year after climbing 2.6% in June. On a month-over-month basis, prices rose 0.1%, also matching forecasts.
The Details Beneath the Headline Number
Despite the encouraging year-over-year trend, analysts flagged some less reassuring details underneath the topline figures. Omair Sharif, founder of Inflation Insights, noted that a sharp drop in hotel prices — a decline unlikely to be sustained — drove much of the month-over-month easing in core inflation, while more categories of core goods actually saw rising prices compared to June, suggesting inflation pressure may be broadening even as the headline rate cools.
What It Means for the Fed's Next Move
Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, said the in-line inflation reading keeps the "no need to hike rates" narrative intact — a view that had already begun taking hold after last Friday's report showing the economy unexpectedly shed jobs in July. She cautioned, however, that one more round of inflation data is due before the Fed's September meeting, meaning the outlook "could still change."
New York Fed President John Williams has said he expects inflation to keep easing as the effects of last year's tariff increases and the Middle East war fade, a dynamic he believes will allow the Fed to hold its policy rate steady. Fed Chairman Kevin Warsh, who has notably removed forward guidance from the Fed's post-meeting statements, has said little publicly about what specifically would move him to support a rate change.
Traders Shift Bets Toward a Hold
Following the CPI release, traders added to bets favoring no change in rates at the Fed's September 15-16 meeting. As recently as a week or so ago, markets had been pricing in a strong likelihood of a rate hike at that meeting — a dramatic shift driven largely by the weaker-than-expected July jobs report combined with Wednesday's inflation data.
A Split and Uncertain Committee
The Fed's rate-setting committee has been notably divided in recent months. At its July meeting, the FOMC voted 9-3 to hold rates steady in a range of 3.50% to 3.75%, with Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan all dissenting in favor of a rate hike. Warsh said at the time that holding steady was "especially prudent" given ongoing uncertainty, while stressing the Fed remains focused on its 2% inflation target despite more than five years of above-target readings.
What Analysts Expect Going Forward
Olu Sonola, head of US economics at Fitch Ratings, wrote in a note that without forward guidance from the Fed, "the September decision will likely remain a close call until the very end," adding that "it will not be a slam dunk: whether it is a hold or a hike, both hawks and doves will find enough in the data to make their case."
What to Watch Next
One more major inflation report is due before the Fed's September meeting, and analysts say that data could still shift the calculus if it tells a substantially different story than July's reading. For now, markets are leaning toward a hold, but with the committee split and inflation still running above target after more than five years, the September decision remains genuinely uncertain. For the Fed's official statements and data releases, see the Federal Reserve's press release page.