Yesterday, the US financial media came close to ridicule in their commentary on the July 2025 CPI data, attributing the slight increase to the Customs Duties that went into effect in April. A closer look at the data tells a more nuanced story.
Headline CPI Figures
- CPI all items (Y/Y %): June 2.67 → July 2.70
- CPI all items (vs. previous month %): July 2024 +0.12 → July 2025 +0.15
The July 2025 year-over-year increase is minimal and largely reflects the comparison to a weak July 2024 base. The monthly increase of +0.15% annualizes to about +1.80%, still below the Fed’s 2% target.
Sector Contributions to CPI
- Food: +2.87% Y/Y – 13.6% relative importance
- Energy: -1.55% Y/Y – 6.45% relative importance
- Shelter: +3.67% (3.80% in June) – 35.42% relative importance
- Medical care: +4.30% Y/Y – 6.75% relative importance
- Motor vehicles (maintenance & insurance): +5.70% Y/Y – 6.27% relative importance
Tariffs and Medical Care Costs
The largest increases came in services and medical care (particularly drugs and hospital services), where tariffs have already taken effect. In Q1 2025, the Trade Balance shows that drug imports reached 90% of the total 2024 volume, as importers stocked up ahead of tariff hikes. Under the “next in, first out” pricing approach, selling prices are now set based on the future purchase cost (including tariffs) plus margins, rather than past purchase costs.
Rate Cut Prospects for September
Positive Factor: CPI remains stable, with the monthly change translating to just 1.8% annualized.
Negative Factors:
- Much of the slowdown in inflation growth comes from just two sectors—energy and shelter—which together make up 41.87% of the index.
- Energy: -0.32% in June → -1.55% Y/Y in July.
- Shelter: -0.19% vs. previous month.
- If crude oil rises above $72–75, inflationary pressure could return, compounded by tariff pass-through pricing.
- The 13-week bill yield remains at 4.13%. Dropping it to 4.00 in one month is a difficult task under current conditions.
Fed’s Dilemma
The conditions for a 25-basis-point rate cut are not strong at present. However, politics may dictate otherwise. The US administration will want at least one visible “win” within the first 7–9 months of Trump’s term, making a rate cut likely regardless of pure economic justification.
A possible scenario is that the Fed lowers the 3-month benchmark rate while leaving the 30-year mortgage rate unchanged. This would enhance Trump’s image and benefit the banking sector, which tends to delay loan approvals. In contrast, lowering rates on existing mortgages has little near-term effect on the broader US economic system.
Conclusion
CPI data show stability rather than significant inflationary pressure, but the relief is concentrated in a few key sectors. The Fed’s decision in September will likely be influenced as much by political optics as by economic fundamentals.