July inflation shows modest rise, raising chance of rate cut

The impact of Trump-era tariffs on goods and services is starting to trickle through the economy, but for now, the effect on inflation appears minimal, raising expectations for a potential interest rate cut in the near term.

The July Consumer Price Index, released Tuesday, showed headline price growth of 2.7% over the previous year, the same as the month prior. Core CPI, which excludes food and energy, rose to 3.1%, up from 2.9% in June. The readings were relatively consistent with forecasts.

Prices for some goods and services, including transportation and medical care, have shown signs of increasing. But items affected by tariffs, such as autos and major appliances, have yet to show an impact, as businesses opt to shield customers from price hikes.

Members of the Federal Reserve’s rate-setting committee, including Fed Chair Jerome Powell, have voiced reluctance to cut rates in light of tariffs, citing uncertainty about how levies on imports will impact the economy.

Last month, Powell said the Federal Open Market Committee likely would have cut rates already this year had it not been for uncertainty around tariffs and other policy developments involving immigration and government spending.

With inflation data showing muted movement and concerns mounting over a weakening labor market, the balance of the central bank’s dual mandate of price stability and full employment may be shifting, according to Dawit Kebede, senior economist at America’s Credit Unions.

“July prices increased in line with expectations, with the items most likely to be impacted by tariffs either rising at a slower rate or remaining flat compared to June’s print,” Kedebe said Tuesday in a statement. “Given the weakening labor market and restrictive monetary policy, the Federal Reserve will most likely cut rates in September. Markets are already pricing in a higher probability of this move.”

Fed Vice Chair for Supervision Michelle Bowman, in a recent speech, noted that she foresees three interest rate cuts this year, a view recently bolstered by most recent data about the labor market.

The latest employment report, which showed that employers added just 73,000 jobs in July — a figure below the pace seen in recent months — is grounds to shift the Fed’s monetary policy from restrictive to neutral, Bowman said.

“In terms of risks to achieving our dual mandate, as I gain even greater confidence that tariffs will not present a persistent shock to inflation, I see that upside risks to price stability have diminished,” Bowman said on Saturday, speaking to the Kansas Bankers Association. “With underlying inflation on a sustained trajectory toward 2%, softness in aggregate demand, and signs of fragility in the labor market, I think that we should focus on risks to our employment mandate.”

Though the likelihood of an interest rate cut appears to be growing, one regional Federal Reserve bank president signaled caution Tuesday about easing monetary policy. 

Federal Reserve Bank of Kansas City President Jeff Schmid said he thinks it’s too early to change approaches. Speaking at the Southern Economic Development Council Annual Conference in Oklahoma, Schmid highlighted “a modestly restrictive policy stance” as the appropriate reaction to recent inflation data.

“While increased tariffs seem to be having a limited effect on inflation, I view this as a rationale for keeping policy on hold rather than an opportunity to ease the stance of policy,” Schmid said.