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In July 2025, US inflation accelerated, with the core Consumer Price Index (CPI), excluding volatile food and energy, climbing 0.3% month-over-month and reaching a 3.1% annual rate—the fastest since January. Driven by rising service costs like airfares, medical care, and recreation, this uptick signals persistent inflationary pressures that are sending ripples through key traded assets, currencies, commodities, and equities. While goods inflation remained subdued, the interplay of tariffs, consumer demand, and Federal Reserve policy expectations is reshaping market dynamics.
The overall CPI rose 0.2% from June, hitting a 2.7% year-over-year rate, slightly below the anticipated 2.8%. Shelter costs, a significant component of services, increased 0.2% for the second consecutive month, while a broader services gauge, excluding housing and energy, surged 0.5%—one of the strongest gains in 2024. Goods prices, such as toys and household furnishings, saw modest increases, with tariff-exposed categories growing more slowly than in prior months. Used car prices also rebounded, adding complexity to the inflation outlook.
Financial markets initially absorbed the data with optimism, as Treasuries rallied and the S&P 500 opened higher, though gains later moderated. Investors are increasingly betting on a Federal Reserve rate cut in September, driven by a softening labor market and the perception that tariffs are being absorbed into corporate profit margins rather than fully passed to consumers. This expectation bolstered equities, particularly in sectors like technology and consumer discretionary, which saw gains of over 20% since the April correction low. However, persistent services inflation raises concerns about sustained price pressures, potentially capping equity upside if rate cuts are delayed.
Currencies felt the impact as well, with the US dollar weakening by approximately 10–11% in the first half of 2025, as measured by the DXY index (~98). Rising inflation and tariff uncertainties have eroded confidence in the dollar’s stability, prompting investors to shift toward safe-haven assets. Gold, a traditional inflation hedge, saw increased demand, with prices climbing as markets reacted to inflationary signals and geopolitical tensions. Other currencies, like the Japanese yen, gained traction following trade agreements that lowered tariff expectations, potentially supporting further yen appreciation if Japan’s central bank raises rates.
Commodities exhibited mixed responses. Oil prices spiked due to heightened Middle East tensions, with potential disruptions to Iranian production threatening to lift headline inflation further. Copper prices surged after new 50% tariff announcements, though forecasts suggest a slide toward $9,100 per metric ton by Q3 2025 as import dynamics adjust. Food prices, including fruit and beef, rose over 1% in June, reflecting early tariff impacts, while energy prices remained volatile, with gasoline dropping 2.2% and fuel oil rising 1.8% in July. These fluctuations underscore the sensitivity of commodities to both policy changes and global supply dynamics.
The broader economic context amplifies these effects. Tariffs, averaging 19–20%—the highest in a century—have added an estimated 2.1% to consumer prices, though companies’ reluctance to fully pass on costs has tempered immediate impacts. Upcoming retail sales and consumer sentiment reports will clarify whether consumer spending, bolstered by a 1.2% rise in real hourly earnings, can sustain economic momentum. Meanwhile, the Federal Reserve faces a delicate balancing act, as a potential stagflation scenario—combining sluggish growth and inflation above 3%—could complicate rate decisions. Investors are advised to diversify into international equities and real assets like real estate to navigate these uncertainties, as inflation continues to reshape the investment landscape.
