US inflation steady at 2.7% in July as markets eye possible Fed rate cut

US inflation remained unchanged in July despite import tariffs, fuelling expectations that the Federal Reserve could lower interest rates next month.

Official data released on Tuesday showed consumer prices rose 2.7% in the year to July, matching June’s pace. Lower energy costs helped offset price increases in goods such as coffee, tomatoes, and tools.

Analysts say the steady headline inflation rate supports the case for a rate cut to stimulate the slowing economy, especially as job growth cools.

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However, core inflation which excludes food and energy rose by 3.1%, its fastest pace since February, raising questions about underlying price pressures.

Seema Shah, chief global strategist at Principal Asset Management, said she still expects the Fed to lower borrowing costs in September.

While there are signs that tariffs are filtering into consumer prices, she noted the impact remains limited for now.

The Federal Reserve targets a 2% inflation rate and has so far resisted pressure from President Donald Trump to cut rates, citing concerns that tariffs could accelerate price growth.

Trump has renewed his calls for rate cuts and threatened legal action against Fed Chair Jerome Powell over unrelated matters.

Average US tariff rates have surged this year, with most goods facing at least a 10% levy since April, and some including cars facing up to 50%. Key items such as oil, smartphones, and most imports from Canada and Mexico remain exempt.

Price increases in July were driven by areas not directly affected by tariffs, including airfares, which rose 4%, and dental services, which climbed 2.6%.

Clothing prices, expected to be hit harder by tariffs, increased only 0.1% over the month.

Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said the latest figures give the Fed room to focus on labor market weakness in September but warned that tariff-related price hikes could intensify later in the year.

(BBC)