Which Inflation Do You See?
July’s inflation report was a bit like a Rorschach test.
Those who don’t see inflation as a problem can point to the fact that July’s headline prices were up 2.7% from a year ago, better than economists’ forecasts of 2.8%. July’s annual increase matched June’s, which prevented annual inflation for headline prices from accelerating for two months in a row. Consumers saw price stability and outright declines for several important consumer expenses; energy prices were down 1.6% from a year ago, with gasoline prices down 9.5%.
Those who do see inflation as an ongoing concern will focus on core CPI, which strips out volatile food and energy categories. Here, core prices were up 3.1% from July 2025, a little more than the expected 3%. And unlike headline CPI, annual increases for core prices accelerated in July. Interestingly, while all eyes were on how or whether tariffs would drive goods inflation higher, it was a jump in prices for services that drove core inflation’s acceleration.
At any rate, annual changes for both headline and core inflation remain above the Federal Reserve’s 2% target (which is based on a different inflation measure). See the exhibit for inflation trends.
Exhibit: Consumer-Price Index (Change From a Year Earlier)
Source: Labor Department, The Wall Street Journal, Clayton Wealth Partners.
Tariffs are likely working their way into consumer inflation. But what mattered most to markets is that tariffs do not appear to be having an outsized impact on inflation—at least not yet. That’s enough to alleviate market worries for now and, as of this writing, for traders to predict that a rate cut by the Fed in September is all but locked.
Bullish
- U.S.-China trade tensions have cooled with a temporary slash in tariffs.
- The Fed has made good progress in reducing inflation since 2022.
- The most attractive yields for fixed income and cash in years.
- Credit spreads remain contained.
- Consumer and corporate balance sheets generally remain healthy.
Bearish
- Slowing global economic growth.
- Trade policy uncertainty is having a negative effect on consumer and business confidence.
- Housing affordability remains at a decades-low.
- Leading indicators of unemployment are generally trending down.
- Delinquency rates on consumer loans are rising.
- Russia-Ukraine war, Middle East conflict, and other geopolitical concerns.
- China is experiencing a growth recession, with deflation fears growing.
- Federal debt and deficits have ballooned.