In July, inflation was flat overall, going against economists’ predictions for a small increase. Consumer prices increased by 0.2% over the month, which was enough to hold the annual inflation rate at 2.7%. Declining gas prices and steady food prices offset the increase in the all index. Looking beneath the surface at the underlying price trends, there was a notable uptick in tariff-related pressures.
Economists were expecting inflation to rise to 0.2% from June, since several economic indicators pointed to an increase. The inflation data just released show a key reason why. The core Consumer Price Index (CPI), which excludes unstable food and energy prices, soared by 0.3% month-over-month. That comes out to a 3.1% annual rate for the core CPI, its highest rate in five months.
Even the core goods category—which often moves in the opposite direction—was in on the action last month, increasing 0.2% for the second straight month. This increase reflects an impressive downshift in the pace of underlying price pressures. Tariffs appear to have a disproportionate effect on certain sectors over others. Recent inflation data indicates that overall economic inflation appears to be stable and stagnant. Now, some regions are experiencing increased costs as a result of tariffs that the last administration placed.
The trend for core inflation numbers is up but moderate. There’s more at work than just that in providing greater overall inflation support. Gas prices fell this month, contributing to a stable overall index. At the same time, all food prices were virtually unchanged. Economists had predicted a 2.8 percent annual inflation rate. The remarkable true steady state rate has generated some of the most excitement among wonks.
How did the financial markets respond to the good news on inflation? S&P 500 futures were up 0.45% and Nasdaq 100 futures were up 0.5%. This increase is a strong confirmation of the optimism of investors in response to the inflation data and what it portends for future monetary policy.