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By Shane Croucher
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Federal data shows that inflation held fairly steady in July, defying fears of a sharp tariff-driven spike in consumer prices and good news for President Donald Trump, who is pushing for the Federal Reserve to slash interest rates.
Markets are widely anticipating a rate cut at the Fed's September meeting, an assessment unlikely to be moved by the July inflation data. But the trend in underlying inflation does give some analysts cause for concern about the outlook for prices.
Trump has fiercely criticized Fed Chair Jerome Powell on rates, accusing him of acting "too slow" while other central banks around the world cut, needlessly holding back the United States economy with higher borrowing costs.
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So far, an increasingly divided Federal Open Market Committee (FOMC) has resisted cutting rates to wait for more data over the summer on the impact of tariffs on consumer prices. It last cut in December 2024, setting the target range at 4.25 to 4.5 percent.
Price increases have been modest relative to expectations, but slashing rates prematurely could accelerate inflation. The Fed is mandated to target a 2 percent rate of inflation and full employment.
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What Inflation Data Shows
The U.S. Bureau of Labor Statistics (BLS) said its Consumer Price Index (CPI) measure of inflation increased by 0.2 percent on the month in July, a little slower than June's 0.3 percent reading.
Annually, CPI inflation rose by 2.7 percent in July, the same reading as the previous month. But core inflation, a measure widely watched by economists, which strips out volatile food and energy prices, rose to 3.1 percent in July, up from 2.9 percent.
Gas prices fell 2.2 percent from June to July and have plunged 9.5 percent from a year earlier, the government's report said.
Grocery prices slipped 0.1 percent last month, though they are still 2.2 percent higher than a year ago. Restaurant meals continued to get more expensive, however, rising 0.3 percent in July and 3.9 percent from a year earlier.
Tariffs appeared to raise the cost of some imported items: Shoe prices jumped 1.4 percent from June to July, though they are still just 0.9 percent more expensive than a year ago.
The cost of furniture leaped 0.9 percent in July and is 3.2 percent higher than a year earlier. Clothing prices ticked up 0.1 percent in July, after a larger rise in June, though they are still slightly cheaper than a year ago.
Americans are likely to absorb more trade-war costs in the coming months as Trump begins to finalize tariffs. Once businesses know what they will be paying, they are more likely to pass those costs to customers, economists say.
Federal Reserve in Difficult Spot
Stubbornly high inflation puts the Federal Reserve in a difficult spot: Hiring slowed sharply in the spring, after Trump announced tariffs in April. The stalling of job gains has boosted financial market expectations for an interest rate cut by the central bank.
Powell has warned that worsening inflation could keep the Fed on the sidelines, a stance that has enraged Trump, who has defied traditional norms of central bank independence and openly demanded lower borrowing costs.
"CPI was in line with expectations, but the trend is heading in the wrong direction," said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, in a post on X.
"It may not prevent a rate cut by the Fed in September, because policy is 'restrictive' but progress toward 2% inflation appears to have stalled," Jones wrote.
Brian Jacobsen, chief economist at Annex Wealth Management, told Reuters that the "core message in core inflation is that any tariff-induced inflation is likely to be a process, not an event."
"Eventually, tariffs can show up in varying degrees in consumer prices, but these one-off price increases don't happen all at once. That will confound the Fed and economic commentators for months to come," he said.
"As long as breakeven inflation rates and other market based measures of inflation expectations stay contained, the Fed should feel comfortable enough to recommence cutting in September."
BLS in Spotlight as Trump Replaces Head
Tuesday's data arrives at a highly-charged moment for the Labor Department's BLS, which collects and publishes the inflation data.
Trump fired Erika McEntarfer, then the head of BLS, after the August 1 jobs report also showed sharply lower hiring for May and June than had previously been reported.
The president posted on social media Monday that he has picked E.J. Antoni, an economist at the conservative Heritage Foundation and a frequent critic of the jobs report, to replace McEntarfer.
"E.J. will ensure that the Numbers released are HONEST and ACCURATE," Trump said on Truth Social.
Adding to the BLS's turmoil is a government-wide hiring freeze that has forced it to cut back on the amount of data it collects for each inflation report, the agency has said.
UBS economist Alan Detmeister estimates that BLS is now collecting about 18 percent fewer price quotes for the inflation report than it did a few months ago. He thinks the report will produce more volatile results, though averaged out over time, it will still be reliable.
This article includes reporting by the Associated Press.
Update 8/12/25, 9:59 a.m. ET: This article was updated with additional information.
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