The U.S. Consumer Price Index (CPI) data for July 2025, released on August 12, showed a moderate increase in inflation that was largely in line with market expectations. The headline CPI rose by 0.2% month-over-month, slightly down from June's 0.3% increase, with the annual inflation rate holding steady at 2.7%. This matched June's annual rate and was just below economists' forecasts of 2.8%.
Core inflation, which excludes the volatile food and energy sectors, increased by 0.3% for the month and by 3.1% year-over-year, marking the highest annual core inflation in five months. Key drivers of the core CPI rise included service prices such as airline fares, medical and dental services, as well as household furnishings and motor vehicle parts. Energy costs declined by 1.1%, led by a drop in gasoline prices of 2.2%, while food prices remained mostly stable.
The data raised a mixed signal for the Federal Reserve's monetary policy. While the modest headline inflation supports expectations for a possible interest rate cut in September 2025 to stimulate the economy amid signs of weakness in the labor market, the rise in core inflation and sticky service prices suggest caution. Many economists and market analysts see a high probability of a 25 basis points cut in September, but this decision remains closely tied to upcoming economic data, especially employment figures.
July's CPI report indicates contained inflation pressures but underscores continuing underlying inflation concerns, creating a sense of urgency for the Federal Reserve's rate decision in the coming month.