NEW YORK — U.S. consumer prices cooled in July, with the annualized inflation rate dipping to 3.4 percent, down 0.7 percentage point from June. Core inflation, which excludes volatile food and energy prices, edged up to 2.5 percent year-over-year and 0.2 percent month-over-month — still well above the Fed's 2 percent target.
The mixed data hit Treasuries immediately. The two-year note drew buying as expectations for a September hike faded, but longer-duration instruments held firm under the weight of persistent core inflation, leaving the curve's longer end anchored by price pressures the Fed has not yet extinguished.
Gasoline prices fell nearly 3 percent in July, pulling the energy index lower. Even so, pump prices average $4 a gallon nationally, according to AAA, and remain roughly 15 percent above year-ago levels.
Geopolitical tensions keep a floor under energy costs. Brent crude dipped in June during a brief ceasefire between the United States and Iran, then rose again in July after that agreement collapsed. Negotiations to reopen the Strait of Hormuz have stalled. President Donald Trump said Iran must agree to compensate for the deaths of American soldiers and Iranian civilians to secure a deal — terms Iran's leadership is unlikely to accept.
Beyond energy, the indexes for food and services each rose 3 percent from a year earlier. Shelter, transportation and medical care all contributed. Grocery prices edged lower, with lettuce down 16 percent over the past year following a cyclosporiasis outbreak.
The inflation data arrived alongside a weak July jobs report: employers unexpectedly shed 23,000 positions, and prior payroll counts for May and June were revised down a combined 103,000. The labor market is softer than the headline figures previously suggested.
That weakness is reaching workers' paychecks. Hourly wages fell 0.2 percent in real terms in July, erasing nominal gains and threatening the consumer spending that underpins GDP growth.
Federal Reserve Chair Kevin Warsh has repeatedly emphasized his commitment to price stability. Last month, Fed officials voted 9-3 to hold rates — the first three-dissenter policy vote in a decade — reflecting a genuine split within the Federal Open Market Committee over the path forward.
Taken together, July's CPI and jobs data reduce the immediate case for another rate increase. Futures markets have repriced toward a September pause. That shift should flatten the yield curve further: short-term yields will fall faster as tightening expectations recede, while long-term yields stay elevated on persistent core inflation and fiscal supply pressure.
