US markets reacted cautiously Tuesday following July’s inflation data, which showed consumer prices rising modestly but core inflation edging higher, prolonging uncertainty over the Federal Reserve’s next moves.
Headline Consumer Price Index (CPI) increased 0.2% in July, holding the year-over-year rate steady at 2.7%. Meanwhile, core CPI, which strips out food and energy, rose 0.3%, pushing annual core inflation up to 3.1% from 2.9% in June.
Analysts said the data reflect ongoing tariff-driven inflation pressures, complicating the Fed’s challenge of balancing price stability with support for the labor market.
“The details show tariff-related price increases continuing to seep into the economy,” said Wells Fargo analysts. They remain cautious about aggressive rate cuts, adding, “Unless the labor market deteriorates more markedly, it is hard to make the case that monetary policy should be accommodative at present.”
Jeffrey Roach, chief economist at LPL Financial, highlighted risks of a “stagflation-lite” environment.
“Core inflation accelerated to 3.1% from 2.9%, and we expect further inflation pressure as tariff impacts show up,” he said. That said, Roach expects the Fed to cut rates next month due to a weakening labor market.
While Roach points to inflationary risks tempered by labor market weakness, Eric Teal chief investment officer at Comerica Wealth Management highlighted shifts in the yield curve that also signal the likelihood of rate cuts.
“More signs of a bull steepening yield curve, suggesting that for the economy to avoid stall speed, rate cuts are more likely as inflation appears temporarily contained,” Teal said.
Chris Zaccarelli, chief investment officer at Northlight Asset Management, was skeptical that tariffs will cause sustained inflation. “This report will not deter the Fed from cutting rates next month,” he said, adding that upcoming jobs and CPI reports will be key to the Fed’s decision.
In contrast, Larry Tentarelli, chief technical strategist at Blue Chip Daily Trend Report, warned against expecting a September rate cut. “Two consecutive months of higher 12-month inflation make it difficult for the Fed to justify easing,” he said.
Tentarelli remains bullish on stocks but said a drastic labor market decline would be needed to change his outlook. “If the Fed has to choose between shoring up the labor market or fighting inflation, we believe they will opt to backdrop the labor market.”
The data intensify debate on how the Fed will balance inflation risks with labor market concerns ahead of its September meeting.