What to expect from next week's US CPI release

​​​Core inflation set for modest monthly uptick

​Analysts are forecasting core Consumer Price Index (CPI) to rise 0.3% month-on-month (MoM) for July, representing a modest but meaningful increase in underlying price pressures. This measure, which excludes the volatile food and energy components, provides the clearest picture of inflation trends that central bankers focus on.

​The expected 0.3% monthly rise reflects persistent services sector inflation, which has proven particularly sticky throughout this economic cycle. Housing costs, medical services, and other core components continue to show upward momentum despite the Federal Reserve's (Fed) aggressive tightening campaign.

​This monthly increase would keep core inflation well above the pace needed to achieve the Fed's 2% annual target. The persistence of these underlying price pressures has become a key challenge for policymakers attempting to restore price stability without triggering a severe economic downturn.

​Annual headline figures expected to hold steady

​Headline CPI is projected to remain largely unchanged on a year-over-year (YoY) basis, holding around 2.7% to 2.8%. This stability masks the underlying monthly dynamics that continue to drive price pressures across the broader economy.

​The forecast suggests that while monthly price increases persist, they're roughly matching the pace seen a year ago. This creates a plateau effect in annual comparisons that could provide some comfort to Fed officials seeking signs of moderating inflation momentum.

​Energy prices will play a crucial role in determining where headline CPI lands within this range. Recent oil market volatility and seasonal gasoline demand patterns could influence the final reading, creating uncertainty around the precise figure.

​Food price developments also remain important for headline inflation, with agricultural commodity markets showing mixed signals. Weather patterns, supply chain disruptions, and seasonal factors all contribute to MoM variations in this volatile component.

​Base effects could provide downward pressure

​Analysts note that favourable base effects might actually nudge headline CPI lower if the MoM reading comes in below the level recorded in the same month a year ago. This mathematical relationship highlights the importance of monthly momentum in determining annual comparisons.

​These base effects reflect the way annual inflation is calculated, comparing current month prices to the same month in the previous year. If July's monthly increase is smaller than July 2024's increase, the annual rate could decline even with positive monthly price growth.

​Tariff-related inflation impacts remain muted

​Many analysts expect that inflation stemming from recent tariff implementations may not yet show up meaningfully in July's CPI figures. The lag between tariff announcements and their appearance in consumer prices creates timing uncertainty for traders.

​This delay reflects the complex supply chain dynamics through which tariff costs filter into retail prices. Companies often absorb initial cost increases while renegotiating supplier contracts or seeking alternative sourcing arrangements before passing costs to consumers.

​The absence of immediate tariff impacts in July data doesn't diminish their longer-term inflation potential. Traders should consider that future CPI readings may show more pronounced tariff effects as these policy changes work through the economy.

​Federal Reserve policy implications intensify

​With the Fed's next rate decision scheduled for September 16-17, July's CPI report takes on heightened significance for monetary policy expectations. Central bank officials have emphasised their data-dependent approach, making each inflation reading crucial for policy calibration.

​The combination of CPI data and upcoming employment figures will shape market expectations for the Fed's policy trajectory. Any surprises in either direction could alter the perceived likelihood of rate changes at the September meeting.

​Current market pricing reflects uncertainty about the Fed's next moves, with traders positioning for various scenarios. The persistence of core inflation above target levels continues to support the case for maintaining restrictive monetary policy.