The Bureau of Labor Statistics reported that U.S. annual CPI inflation cooled to 3.4 percent in July, down from 3.5 percent in June and in line with market expectations. Core inflation, which strips out volatile food and energy prices, fell to 2.5 percent from 2.6 percent in the previous month.
The Consumer Price Index (CPI) cooling was driven by a 2.9 percent decline in gasoline prices, though tensions with Iran caused a late-month surge. The data comes as the Federal Reserve faces growing calls to raise rates.
The energy factor: War, peace, and pump prices
The CPI inflation slowdown is largely an energy story. Gasoline prices fell 2.9 percent in July from the previous month, helping to keep a lid on inflation. The index for shelter rose just 0.1 percent, accounting for roughly two-thirds of the monthly all-items increase, while energy prices were down 1.5 percent overall.
The decline in energy costs was enough to offset increases in other areas, including food and shelter. However, the relief may be short-lived. Tensions with Iran caused gas prices to jump later in July, and the peace talks remain quite bumpy.
Inflation actually hit a three-year peak of 4.2 percent back in May. That spike was mostly due to the war messing with energy supplies, on top of extra price pressure from tariffs and the big artificial intelligence (AI) boom.
While the July numbers show things are finally starting to cool down, the situation with Iran is still pretty unpredictable, which keeps the outlook uncertain (not only for the U.S., by the way).
What this means for the Fed
The slowdown in price increases could ease pressure on the Federal Reserve (Fed) to hike interest rates. Chairman Kevin Warsh has said the bank is committed to bringing down inflation, which has run above the 2 percent target for years.
Boston Fed president Susan Collins told in an interview this week that the Fed may have to act in September as many Americans struggled to make “ends meet.”
Long-term bond yields jumped last month after policymakers voted to hold rates steady at their July meeting. The latest data may give the Fed room to pause, but core inflation at 2.5 percent remains above the 2 percent target. Markets are pricing in a roughly 40 percent chance of a rate hike by year-end.
Crypto market reacts: Relief, but caution remains
The softer inflation print brought a brief “exhale” to crypto markets, but relief was tempered. Bitcoin climbed about 1.3 percent following the news to $64,380, but had a correction afterward, trading around $63,800 at the time of writing.
The Crypto Fear and Greed Index remained in “Fear” territory. The Fed’s July 29 decision to hold rates steady at 3.5 to 3.75 percent, with three officials dissenting in favor of a hike, underscores the central bank’s hawkish stance.
Spot Bitcoin exchange-traded funds (ETFs) snapped an eight-week outflow streak, recording $287 million in inflows after the data. However, July is on track for the products’ smallest monthly net inflows since launch.
Polymarket traders assigned a 66 percent probability (as shown above) that the Fed would hold rates steady. As long as inflation remains above the 2 percent target, rate cuts remain off the table, and without them, crypto’s next leg up may have to wait.
