Quick Facts
August 13, 2025: The US Consumer Price Index (CPI) remained flat in July, coming in at 2.7%, according to data released by the Bureau of Labor Statistics (BLS).
US Inflation Remains Stable, Core CPI Surges: What’s Next for the Fed?
The US Consumer Price Index (CPI) remained flat in July, coming in at 2.7%, according to data released by the Bureau of Labor Statistics (BLS). This was largely in line with market expectations, as inflationary pressures have been steadily easing off in recent months. However, the more closely watched Core CPI, which strips out food and energy prices, accelerated to 3.1%, sparking fresh concerns about the Federal Reserve’s future monetary policy decisions.
The Market’s React to Rising Core CPI
The sharp jump in Core CPI, which followed a 2.8% reading in June, has sent market odds of a September Fed rate cut surging to 94%. This represents a significant increase from just a week ago, when the odds of a cut were around 70%. The sudden shift in expectations reflects the growing consensus among investors that the Fed will need to take action to counterbalance the rising inflationary pressures.
Consequences of a September Rate Cut
A September rate cut, if implemented, would mark the fourth consecutive reduction in federal funds target rate. This would bring the benchmark rate down to 1.75%, a level not seen since 2018. The implications of such a move would be far-reaching, with potential effects on the economy, financial markets, and individual investors.
On the positive side, a rate cut could:
- Boost consumer spending: Lower borrowing costs would make it more attractive for consumers to take on debt, particularly in areas such as mortgages and auto loans. This could lead to increased spending and, in turn, support economic growth.
- Strengthen equities: A rate cut would likely boost investor sentiment, as lower borrowing costs would make stocks more attractive. This could lead to a surge in equity markets, particularly in sectors sensitive to interest rates, such as financials and real estate.
- Cap yields: A rate cut would put downward pressure on bond yields, making bonds less attractive to investors. This could lead to a sell-off in government bonds, which could ultimately benefit equities.
However, there are also potential risks to consider:
- Risk of asset bubbles: A prolonged period of low interest rates could lead to the formation of asset bubbles, particularly in areas like stocks and bonds. This would increase the risk of a sharp correction when rates eventually rise.
- Inflation concerns: A rate cut could spark concerns about the potential for inflation to soar, particularly if wage growth accelerates. This could lead to a surge in commodity prices and potentially undermine the Fed’s inflation-fighting efforts.
- Global implications: A rate cut could have unintended consequences for the global economy, particularly in countries with already-weak economies. This could lead to a surge in foreign capital fleeing the US and seeking higher returns elsewhere.
The Fed’s Dilemma
The September rate cut debate has highlighted the Federal Reserve’s delicate balancing act. On one hand, the Fed needs to consider the potential benefits of a rate cut in terms of supporting economic growth and job creation. On the other hand, it must weigh the risks of fuelling inflation and asset bubbles.
In light of the latest Core CPI reading, it’s clear that the Fed is under pressure to act. However, a rate cut would need to be carefully calibrated to avoid reigniting inflationary pressures. Instead, the Fed may opt for a less aggressive approach, such as reducing the frequency of rate hikes or using alternative tools, such as forward guidance, to influence market expectations.
