US Inflation Rises 2.7% in July, Undershooting Forecasts as Fed Faces Rate-Cut Pressure

US consumer inflation cooled slightly in July, coming in below expectations and fueling market speculation that the Federal Reserve may cut interest rates in the coming months. The slowdown reflects the broader economic impact of President Donald Trump’s tariff policies.

Data from the Bureau of Labor Statistics (BLS) released on August 12 showed the Consumer Price Index (CPI) rose 0.2% from June, in line with forecasts from economists surveyed by Dow Jones. On an annual basis, CPI climbed 2.7%, below the 2.8% projection and matching June’s pace.

Core CPI Edges Higher, Fed Keeps Close Watch
Core CPI — which excludes volatile food and energy costs — increased 3.1% year-over-year, slightly above the 3% forecast. On a monthly basis, core CPI rose 0.3%, in line with expectations. The Fed views this measure as a more reliable gauge of long-term inflation trends.

According to the BLS, a 0.2% rise in shelter costs was the largest contributor to July’s CPI increase. Food prices were flat, while energy prices fell 1.1%. New vehicle prices — often sensitive to tariffs — were unchanged, but used cars and trucks gained 0.5%. Transportation services and medical care costs both climbed 0.8%.

Political Backdrop and Market Implications
The inflation report comes amid political tensions surrounding the BLS. President Trump has accused the agency of “political bias” and dismissed its chief following a weaker-than-expected July jobs report. On August 11, Trump nominated E.J. Antoni — a vocal critic of the agency — to lead the BLS.

Markets See Growing Odds of Rate Cuts
According to CME Group’s FedWatch Tool, traders now see a high probability that the Fed will cut interest rates in September 2025. However, upcoming economic data will play a crucial role in shaping the final decision. Recent Fed commentary has reflected growing concern over labor market conditions, potentially strengthening the case for a rate cut.