July CPI Report Boosts Rate-Cut Odds: What the Experts Say

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The latest Consumer Price Index (CPI) report showed that President Donald Trump's tariff policies continue to have a moderate impact on cost pressures, although the overall data lifted expectations for a September rate cut.

According to the Bureau of Labor Statistics, headline CPI was up 0.2% month over month in July, slower than the 0.3% rise seen in June and in line with economists' estimates.

The CPI was 2.7% higher year over year, unchanged from the month prior and slightly below economists' projections for a 2.8% rise.

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Shelter was the "primary factor" for the monthly increase in headline CPI, according to the BLS, up 0.2% from June to July. However, energy costs declined in July, falling 1.1% as gas prices dropped 2.2%.

Core CPI, which excludes volatile food and energy prices and is seen as a better measure of underlying inflation trends, was up 0.3% month over month and 3.1% year over year. Both figures were higher than what was seen in July, while the annual increase came in hotter than economists' forecasts.

"Inflation is on the rise, but it didn't increase as much as some people feared," says Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. "In the short term, markets will likely embrace these numbers because they should allow the Fed to focus on labor-market weakness and keep a September rate cut on the table."

Over the longer term, though, Zentner says that "we likely haven't seen the end of rising prices as tariffs continue to work their way through the economy."

According to CME FedWatch, futures traders are now pricing in a 90% chance the Fed will issue its next quarter-point rate cut at its September meeting, up from 86% one day ago and 57% one month ago. The betting odds are for two additional cuts by the end of the year.

With the July CPI data now in the books, here's some of what economists, strategists and other experts around Wall Street have to say about the results and what they could mean for investors going forward.

Experts' takes on the July CPI report

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"While one data point does not make a trend, two consecutive months of higher 12-month [core] inflation will make it difficult for the Fed to justify a rate cut at their September 17 meeting. We remain bullish on the S&P 500 index into year-end, but we do not expect a September rate cut unless the jobs market drops off drastically over the next 45 days. 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." – Larry Tentarelli, Chief Technical Strategist for Blue Chip Daily Trend Report

"Today's release showed less of a pickup in goods prices than some were expecting as the tariff pass-through is present but to a lesser degree than was seen in June. Given the uncertain and shifting tariff landscape that existed through the month of July and into August, we would be hesitant to read too closely into today’s release." – Josh Jamner, Senior Investment Strategy Analyst at ClearBridge Investments

"The July CPI report came in broadly in line with expectations, reinforcing the view that inflation is under control, even if not quite at target. The headline print was contained by falling energy and gasoline prices, while services remained the primary driver of the overall increase. Meanwhile, core services inflation was driven by volatile components like airfares and medical care, categories that have a lower weight in the Fed's preferred PCE measure. In our view, the Fed will look through the noise in goods inflation and focus on the broader macro signals; labor market softness, consumer fatigue, and the risk that slowing growth could become deflationary over the medium term." – Daniel Siluk, Head of Global Short Duration & Liquidity at Janus Henderson Investors

"July's CPI figure came in in line with expectations, with core inflation at 3.1% year over year. The Fed is getting the data support that the tariff effect on price level will mostly be transitory. The Fed's policy stance is highly data-dependent, and with inflation contained and labor market softness increasingly evident in revised payroll data, the emphasis will now be skewed toward employment. In essence, this inflation print supports the narrative of an insurance rate cut in September, which will be a key driving force for the markets." – Alexandra Wilson-Elizondo, Global Co-CIO of Multi-Asset Solutions at Goldman Sachs Asset Management

"Although the Fed supposedly focuses more on the core number than on the headline number (in order to strip out the noisier components of inflation), we don't believe that this report will deter the Fed from cutting rates next month. More importantly, there is one more jobs report (on 9/5) and one more CPI report (on 9/11) before the Fed meets again and those reports will take on even more importance as the Fed decides whether to cut rates to preemptively support the labor market or whether the inflation reports are concerning enough that they feel like they need to sit on their hands and wait." – Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management

""So far, U.S. businesses have absorbed the tariff costs, as revealed in many corporate earnings reports. It's only a matter of time before tariff costs make their way through to consumers if businesses want to maintain margins and profitability. We expect at least two rate cuts between now and the end of the year. The Fed is under immense pressure to move off their holding pattern and the data is starting to align with a move towards lower interest rates, which would provide an insurance policy against a slowing economy." – Skyler Weinand, Chief Investment Officer at Regan Capital

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With over a decade of experience writing about the stock market, Karee Venema is the senior investing editor at Kiplinger.com. She joined the publication in April 2021 after 10 years of working as an investing writer and columnist at a local investment research firm. In her previous role, Karee focused primarily on options trading, as well as technical, fundamental and sentiment analysis.