July CPI Eases as Late-July Fuel Prices Raise August Inflation Risk

July inflation slowed

The Consumer Price Index for All Urban Consumers rose 0.1% in July after falling 0.4% in June, the Bureau of Labor Statistics reported on August 12. Twelve-month headline inflation eased to 3.4% from 3.5%. Core CPI, which excludes food and energy, increased 0.2% in July and 2.5% over 12 months, compared with a flat monthly reading and a 2.6% annual rate in June.

Energy prices provided a significant restraint on the July reading. The BLS report showed that the energy index fell 1.5% and gasoline fell 2.9% during the month. Energy remained 14.7% more expensive than a year earlier, and gasoline was up 24.6% over the same period.

Shelter rose 0.1% for a second consecutive month and accounted for roughly two-thirds of the overall monthly CPI increase. Food also rose 0.1%, while airline fares increased 2.2% and medical care rose 0.4%. The moderation in core CPI and shelter indicates that July's improvement was not solely the result of lower fuel prices.

Fuel prices changed after the measurement period

The July data may not reflect energy conditions prevailing late in the month. Axios reported that regular gasoline reached about $4.10 per gallon near the end of July, up from $3.78 several weeks earlier, while West Texas Intermediate crude returned above $80 per barrel amid renewed fighting.

The Energy Information Administration documented substantial petroleum-market disruption around the Strait of Hormuz during the second quarter. EIA data showed Brent futures ranging from $72 to $118 per barrel and estimated regional production shut-ins peaking at 11.2 million barrels per day in May. The duration of fighting and the restoration of normal shipping remain uncertain.

Higher crude and gasoline prices could raise headline inflation in the August report, which is scheduled for September 11. Jim Baird, chief investment officer at Plante Moran Financial Advisors, told Axios that higher energy prices could enter the August data if the geopolitical premium persists. He also said the broader July easing did not establish a durable trend. The size and timing of energy-cost pass-through into freight, air travel, food, and manufactured goods remain unknown.

Federal Reserve faces mixed data

The Federal Open Market Committee held its federal-funds target at 3.50% to 3.75% on July 29 in a 9-3 vote. The Fed statement recorded dissents from Beth Hammack, Neel Kashkari, and Lorie Logan, who each favored a 25-basis-point increase. Inflation remained above the Fed's 2% goal despite July's moderation.

Market pricing moved toward no change at the September 15-16 meeting after the CPI release. Axios cited CME FedWatch data placing the probability of unchanged rates at 59.6%, up from 51.6% one day earlier. Those probabilities describe market pricing at a specific time and can change before the scheduled meeting.

The inflation reading arrived alongside signs of weaker employment. Axios reported that payrolls fell by 23,000 in July, unemployment was 4.1%, and May and June payroll estimates were revised down by a combined 103,000. The combination gives policymakers additional reason to weigh employment risks against renewed energy-driven inflation before September.