Is September the Fed's Easiest Decision All Year?

Keypoints:

• • July's core CPI rose just 0.2% for the month, cooling to 2.5% year over year
  • That's the lowest core inflation reading since March 2021
  • Headline CPI held at 3.4%, with falling energy prices doing most of the work
  • Retail sales for July came in weaker than expected, adding to the case for a Fed hold
  • 94 of 104 economists surveyed by Reuters now expect the Fed to hold rates steady in September

A month ago, economists were roughly split on what the Fed does next. One inflation report later, 94 out of 104 of them are suddenly reading from the same page.

July's core Consumer Price Index rose just 0.2% for the month, pulling the year-over-year rate down to 2.5%, its lowest level since March 2021. Headline inflation held steady at 3.4%, with falling energy prices, down 1.5% as an earlier Iran-related spike kept unwinding, doing much of the heavy lifting. Grocery prices actually declined for the first time since March, a detail that matters more to household budgets than the headline number ever fully captures.

What makes this report land harder than a typical CPI print is what showed up right alongside it. Retail sales for the same month came in weaker than economists expected, and a cooling consumer paired with cooling prices is a combination that reads very differently than either one alone. 

Softer spending plus softer inflation together tell a story of an economy genuinely losing momentum, not just one where prices happen to be behaving. That combination is exactly why the market's read shifted so sharply. 

In a Reuters poll conducted August 12 through 17, 94 of 104 economists now expect the Fed to hold rates steady in September, with market pricing near 70% for that outcome, up from roughly 50% just a week earlier. The Fed rarely gets this much consensus handed to it by the data alone.