A fresh reading on inflation in July has left the Federal Reserve facing a difficult policy choice: act quickly to support a cooling labor market or hold steady to ensure inflation returns to target. Core Consumer Price Index (CPI), which strips out food and energy, rose 3.1% year over year in July — above economists’ 3.0% forecast and up from 2.9% in June. On a monthly basis, core CPI increased 0.3%, matching expectations. Headline CPI rose 2.7% year over year, a touch below the 2.8% consensus.
The mixed picture — a slightly softer headline print but hotter core inflation — complicates the Fed’s September decision. Markets, however, have already swung toward loosening: futures traders are pricing in roughly a 92% chance of a 25-basis-point cut in September. That reflects growing concern about recent labor-market weakness and the potential political impetus for easing.
Employment data released earlier this month deepened that concern. The U.S. added only 73,000 jobs in July, the unemployment rate edged up to 4.2%, and May and June payrolls were revised sharply lower by a combined 258,000. The three-month average for job growth is now about 35,000 — a pace many economists view as consistent with a significant cooling in hiring. Those revisions have amplified calls from some quarters of the Fed to move sooner on rate cuts to cushion the labor market.
At the same time, services inflation, the historically stickier component of the CPI, moved higher in July after moderating earlier in the year. Certain goods categories such as furniture and footwear also showed renewed upward pressure. Because core CPI and core PCE (the Fed’s preferred gauge) tend to move together, the stronger core CPI reading raises the risk that core PCE will also show another above-target reading in coming reports, analysts say.
Policy makers at the Fed remain divided. Several regional presidents and officials have emphasized caution, arguing that elevated inflation — still more than a full percentage point above the Fed’s 2% goal on a core basis — counsels patience. Others have pointed to the softening employment trend as a compelling reason to begin easing policy soon. That split was evident in recent public remarks from Fed officials, who ranged from urging a patient approach to signaling readiness to cut if labor-market deterioration continues.
The White House has also weighed in, increasing political pressure on the Fed to move. That intervention adds another dimension to an already fraught decision, though policymakers stress their commitment to independence and data-driven decisions.
Looking ahead, the Fed will watch August inflation components closely along with incoming employment and consumer spending data. If services inflation continues to run hot, the case for holding rates rises; if job growth further weakens and labor-market indicators soften, arguments for a September cut will strengthen.
For now, the July CPI leaves the Fed between two difficult paths: risk undermining the inflation fight by cutting too soon, or risk further labor-market deterioration by waiting. The choice in September will hinge on the next tranche of inflation and jobs data — and on how policymakers weigh those competing risks.
