29 Sept 2025
The latest Consumer Price Index (CPI) data was largely in line with expectations, though core inflation registered a slight increase. This report, combined with forthcoming economic indicators, will play a critical role in the Federal Reserve's decisions regarding future monetary policy at its September meeting.
Headline inflation, both annual and monthly, aligned with market expectations, while annual core inflation was marginally higher by 0.1%. Overall, data was largely as anticipated.
The overall food index saw a 0.3% decrease in July, with food at home declining by 0.1%. However, food away from home increased by 0.3% during the month, contributing significantly to a 3.9% annual rise, and this sector can influence PCE data.
The energy index experienced a 1.1% decrease, driven by a 0.2% drop in gasoline prices, along with reductions in electricity and gas costs, marking a positive overall decline in this segment.
Housing costs increased by 0.2%, consistent with the previous month, while lodging away from home recorded a 1% decrease.
The medical care sector showed a 0.7% increase, indicating a persistent upward trend in most sub-items, with the exception of prescription drugs, which saw a 0.2% decrease.
Airline ticket prices surged by 4% during the month, and the recreation index also increased by 0.4%.
Home furnishings and supplies increased, and used vehicle prices rose, but new vehicle prices remained largely unchanged. Communications costs decreased by 0.3%.
Most sectors reported either no growth or decreases, a factor critical for predicting the next PCE data, which is expected to align with forecasts, pending review of the upcoming PPI data.
The favorable July inflation data from the previous year, which contributed to calls for interest rate cuts, introduces a significant base effect that must be considered when interpreting the current report.
The report reflects a 15% tariff rate, but higher tariffs (between 15% and 18%) imposed for July have not yet fully impacted the data, meaning their full inflationary effects are not yet visible.
Markets react primarily to expectations surrounding data rather than the actual figures themselves, requiring time to digest information for a true reaction. The market may retrace based on initial reactions.
The super-core inflation, particularly housing, shows a continuing upward trend. Sticky services inflation persists, while core goods, previously a deflationary force, are now contributing to inflation due to base tariffs, creating potential renewed inflationary pressures with core services.
Considering recent data, the US labor market appears reasonably balanced between job openings and unemployed individuals, suggesting the overall economic situation might not be overly concerning.
Key upcoming data, including CPI, PCE, and NFP, along with retail sales, PMIs, and GDP revisions, are crucial for the Federal Reserve's decision-making at its September meeting. A pause in rate hikes is possible if inflation persists and the labor market remains strong, but this is data-dependent.
The market anticipates rate cuts, but critical questions remain about the reasons for such cuts (fear vs. economic stability), their magnitude (25 or 50 basis points), the pace of implementation, and the extent to which they will proceed towards a neutral rate.
If the Federal Reserve's September projections reveal an unexpected increase in expected inflation, even if accompanied by rate cuts, risk markets like the stock market could react with apprehension.
The simultaneous rise of Bitcoin and gold indicates market disappointment with the Federal Reserve's inflation control, prompting a shift towards inflation-hedging assets, a trend observed historically during periods of similar market sentiment.
If the market loses confidence in the Federal Reserve's ability to control inflation, anti-inflationary assets can perform well, drawing in traders and investors.
| Indicator | Observation |
|---|---|
| Headline CPI (Annual & Monthly) | In line with expectations |
| Core CPI (Annual) | Higher than expected (+0.1%) |
| Food Index (Overall July) | Decreased (-0.3%) |
| Food Away From Home | Increased (+0.3%), annual increase of ~3.9% |
| Energy Index | Decreased (-1.1%), good overall decrease |
| Housing | Increased (+0.2%), consistent with previous month |
| Medical Care | Increased (+0.7%), upward trend continues |
| Base Effect | July 2022 inflation was very low, impacting current year-over-year readings |
| Tariffs Impact | Report reflects 15% tariffs; higher 15-18% tariffs' effects not yet visible |
| Super-Core Inflation (Housing) | Upward trend persists, requires attention |
| Core Goods Inflation | Shifting from negative to positive contribution due to base tariffs, now aiding CPI increase |
| Market Reaction | Reacts to expectations, not just actual data; requires digestion time |
| Anti-Inflationary Assets (BTC/Gold) | Simultaneous rise signals market distrust in Fed's inflation control |
| Fed's September Decision | Dependent on upcoming CPI, PCE, NFP, retail sales, PMIs, GDP revisions |
