East Northport, N.Y.: Customers shop the produce section at the Farmer’s Market in East Northport, New York on Aug. 4, 2026.
Steve Pfost | Newsday | Getty Images
Readings for July on the prices consumers pay for goods and services came in pretty much on target Wednesday, driving traders to lower odds for a September interest rate hike even though inflation remains well above the Federal Reserve’s 2% target.
Here are five key takeaways from the Bureau of Labor Statistics report:
- Right on target: The consumer price index rose 0.1% for the month, putting the annual rate at 3.4%. Respective core readings were 0.2% and 2.5%. Both numbers helped feed a narrative that while inflation is still a problem, it seems less so after two consecutive months of benign readings.
- Gassing up for August: But hold on a minute. Both the June and July moderations came largely because of easing in the CPI energy index, which is down 7% from its May historical peak. Crude oil has jumped 10% over the past week, posing upside risks for the August CPI reading unless things cool down in the Middle East.
- Gimme shelter (?): A key ingredient in the inflation run has been shelter, and on that front there has been some good news: The shelter index, which comprises about one-third of the CPI weighting, has risen just 0.1% in the past two months, providing hope on that front as well. Except … much of the work in that regard has been done by sharp declines in the “lodging away from home” category, which has posted sharp declines in three of the past four months. Owners’ equivalent rent, an important category that puts a hypothetical rental value on owner-occupied properties, has held fairly steady during the same period.
- The pre-war story: Put all the numbers together, and you now have core inflation running right where it was prior to the U.S. and Israel attack on Iran in late February. That’s a pretty simple narrative: Were it not for all the turmoil in the Middle East, inflation outside of food and energy — especially the latter — would be heading right back to target.
- The Fed factor: Traders took that benign core number, added it to last Friday’s weak nonfarm payrolls report for July, and came up with an equation that substantially lowered the odds for a rate hike at the Fed’s Sept. 15-16 policy meeting. The market as of late Wednesday morning was pricing in just a 38% chance of a move, down 10 percentage points from Tuesday and well below the 70% or so probability of a month ago, according to the CME Group’s FedWatch, which puts the best chances now on December.
They said it:
“This makes life for the Fed a little bit easier because now there’s less pressure for that hike that everybody was expecting. Inflation appears to be getting tamer.” — Dan North, senior economist, Allianz Trade North America.
“We are sticking with our base case of 75 [basis points] of hikes this year, starting in [September]. But the somewhat benign inflation data over the last two months have increased the risks that hikes will either be delayed (e.g., they might start in [December]) or won’t materialize.” — Stephen Juneau, U.S. economist at Bank of America, explaining the bank’s contrarian rates call.
“The July CPI report was highly anticipated as a crucial datapoint ahead of the FOMC September decision. But its release is unlikely to meaningfully change the stance of many FOMC voters, given elements potentially feeding both the dovish and hawkish narratives.” — Niladri ‘Neel’ Mukherjee, chief investment officer, TIAA Wealth Management.
