July inflation data shows some early impacts from higher tariffs, but not enough to shift the broader trend. Most market participants still expect the Federal Reserve to cut rates in September.

The U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 2.7% year over year in July, matching June’s pace. On a monthly basis, inflation increased 0.2%, down from 0.3% in June.

Core inflation — which strips out volatile food and energy prices — accelerated to 3.1% annually from 2.9% the previous month, marking its highest reading since February. Shelter costs continued to cool, up 3.7% year over year.

“While Core CPI came in hotter than forecast, tariff impacts remain spotty,” said First American Senior Economist Sam Williamson, in a statement. “The Federal Reserve may keep the door open to rate cuts later this year, but will likely want firmer evidence that tariff and labor-related costs aren’t feeding into broader, persistent inflation.”

In July, import-heavy categories like car tires and furniture saw prices edge higher, while other tariff-sensitive goods — such as men’s and women’s apparel — fell as businesses absorbed cost pressures, Williamson noted. 

“The tariff story may be starting to shift,” said Realtor.com senior economist Jake Krimmel, in a statement. “Indexes for home furnishings and used cars increased, hinting that consumers may be starting to feel the effect of tariffs.”

Krimmel added that signs of tariff-driven pressure in core goods or construction inputs could complicate a September rate cut, even as several policymakers signal growing readiness to ease later in the year.

A growing number of market participants — 94% as of Tuesday morning — anticipate a 25-bps reduction in September, according to the CME Group‘s FedWatch tool. The rest expect rates to remain unchanged.

“For housing, higher CPI and PCE inflation (the Fed’s preferred measure) could be key for the future path of mortgage rates,” Krimmel said. “A Fed cut doesn’t guarantee relief, as 10-year Treasury yields, inflation expectations and other market reactions all factor in.” 

According to Krimmel, “If inflation runs hotter, the path for mortgage rates gets cloudier, with markets likely keeping borrowing costs higher for longer.”

The 10-year Treasury yield — closely tied to 30-year mortgage rates — rose 4.3 basis points Tuesday morning to 4.316%, after hitting 4.196% Friday. HousingWire’s Mortgage Rates Center showed conventional mortgage rates at 6.79%, little changed from Friday.

Fed Chair Jerome Powell has taken a cautious stance on rate cuts, frequently warning that President Donald Trump’s tariffs could reignite inflation. His wait-and-see approach has drawn sharp criticism from Trump, who has urged him to resign. Powell has shown no indication he plans to step down.

Treasury Secretary Scott Bessent will interview candidates for Fed chair in the coming weeks. Trump may announce his choice this fall, sources said.

Trump said Monday he plans to nominate economist E.J. Antoni to lead the Bureau of Labor Statistics, replacing Erika McEntarfer, whom Trump fired Aug. 1 after accusing her of manipulating jobs report data.

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