The Bureau of Labor Statistics released July’s Consumer Price Index this morning, and the numbers tell a complicated story. While overall inflation held steady at 2.7 percent annually, core inflation—the measure that strips out volatile food and energy prices—accelerated to 3.1 percent, its highest level since March and well above the Federal Reserve’s 2 percent target.

What the Data Actually Shows

Here’s what happened in July:

The Good News: Headline inflation remained at 2.7 percent despite expectations it would jump to 2.8 percent. Energy costs provided relief, with gasoline prices dropping 2.2 percent and overall energy declining 1.1 percent. For families struggling with Biden’s inflation legacy, cheaper gas is real relief.

The Concerning Reality: Core inflation accelerated to 0.3 percent monthly—the first time in six months it failed to undershoot economist estimates. Services inflation drove much of the increase, with medical care services up 0.6 percent and shelter costs contributing 4.8 percent annually.

The Tariff Effect: Prices heated up in tariff-exposed categories: computers and electronics rose 1.4 percent for the third consecutive month, sporting goods jumped 1.4 percent, and household furnishings increased significantly. Consumer giant Procter & Gamble announced plans to raise prices on about a quarter of its products by an average of 2.5 percent specifically due to tariff costs.

Diving Deeper

• Medical care services: +0.6% monthly

• Personal care services: +0.5% monthly

• Recreation services: +0.4% monthly

• Shelter costs: +0.3% monthly, contributing 4.8% annually

Categories exposed to tariffs showed notable price increases:

Consumer goods giant Procter & Gamble announced it will raise prices on about 25 percent of its products by an average of 2.5 percent due to tariff costs. The company said the increases would begin in the coming months.

The Tax Foundation estimates the tariffs amount to an average household cost of $1,300 in 2025, representing the largest tax increase since 1993.

Federal Reserve Policy Implications

Fed Chairman Jerome Powell held rates steady at 4.25-4.5 percent during the July meeting, citing tariff uncertainty and above-target inflation as barriers to rate cuts. For the first time since 2020, two Fed governors dissented, both favoring a quarter-point rate cut.

Futures markets continue pricing in a 95 percent probability of a rate cut at the September 17-18 Fed meeting, despite core inflation remaining well above the central bank’s 2 percent target.

Economic Data Context

The July jobs report showed weakness with only 73,000 jobs added versus 100,000 expected. Previous months were revised down by 258,000 jobs total.

J.P. Morgan economists project tariffs could boost consumer prices by 1-1.5 percent this year, with vehicle prices potentially rising 11.4 percent if automakers pass along tariff costs to consumers.

Looking Ahead

The August CPI report is scheduled for release on September 11. Economists expect continued inflationary pressure as tariff effects work through supply chains, though overall inflation remains well below the 9.1 percent peak reached in June 2022.