CICC Research reports that the seasonally adjusted US CPI rose 0.1% month-on-month in July, with an annual rate of 3.4%. Core inflation increased 0.2% month-on-month and 2.5% year-on-year, both in line with market expectations. Energy prices continued to decline, but international oil prices have rebounded since August, increasing uncertainty over future energy costs.
On the core inflation front, goods prices were relatively strong while services were weak. Notably, prices for information technology products, such as computers and software, have been rising steadily. This suggests that the supply-demand mismatch driven by the expansion of AI capital expenditure is gradually transmitting to the consumer side. CICC believes that US inflation may have entered a new phase, where the driving force is shifting from supply shocks like tariffs and oil prices to demand expansion fueled by AI investment. As a result, the duration of inflation could be extended.
Key drivers of the shift
Total CPI inflation rose 0.1% month-on-month, with energy prices continuing their downward trend from the previous month. Energy prices fell 1.5% month-on-month in July, with gasoline and fuel oil prices declining 2.9% and 1.7%, respectively, providing a buffer against inflationary pressures. Although international oil prices recovered overall in July due to tensions in the Strait of Hormuz, the average was still lower than in June, thus not adding to month-on-month inflation pressure. However, entering August, international oil prices have shown a volatile upward trend. If this trend continues or oil prices remain stable, gasoline and fuel oil prices will see a month-on-month increase. Food prices were generally moderate in July, rising 0.1% month-on-month and 3.0% year-on-year. Food at home prices edged down 0.1% month-on-month, while food away from home prices rose 0.3% month-on-month.
Core inflation rose 0.2% month-on-month, with a structure of strong goods and weak services. Core goods prices rose 0.2% month-on-month, the highest level so far this year. New vehicle prices rose 0.1% month-on-month, while used cars and trucks rose 0.4%, reflecting a recovery in consumer demand for vehicle purchases and usage as oil prices have fallen. Amid the AI boom, prices for information technology goods rose 1.4% month-on-month. Prices for computers, peripherals, and smart home assistants rose 3.5% month-on-month, the largest increase since 2021. Prices for computer software and accessories rose 0.5% month-on-month and 21.2% year-on-year, the highest annual increase on record. This indicates that the strong AI capital expenditure-driven supply-demand mismatch continues to push up consumer goods prices.
In contrast, rental prices rose 0.1% month-on-month, unchanged from the previous month. Lodging away from home, including hotel accommodation, fell 3.3% month-on-month, a major drag. Core services inflation excluding rent rose 0.2% month-on-month, generally moderate. Prices for medical care services (0.6%) and education and communication services (0.5%) edged up slightly, while airline fares rose 2.2%. However, weaker components such as motor vehicle insurance (-0.3%) limited the upside for services inflation.
Overall, CICC believes that US inflation may have entered a new phase, with its driving forces shifting from the supply side to the demand side. Over the past year, US inflation was primarily influenced by two types of supply shocks: rising import costs from tariffs and higher energy and transportation costs from oil price increases. The tariff shock was mainly concentrated in 2025, and its marginal impact on inflation is fading as base effects gradually diminish. The oil price shock began in March this year, and while it has eased recently, geopolitical risks have not been fully eliminated. The rebound in international oil prices since August means that energy prices could still disturb inflation.
At the same time, a new source of inflation is gradually emerging: the demand shock from AI capital expenditure. Since 2025, US technology companies have continued to expand their AI investments, leading to rapid growth in demand for hardware such as chips, storage, high-end servers, and network equipment. This has caused significant price increases for these products, which are gradually transmitting to the prices of electronic consumer goods and computer software products. Unlike exogenous supply shocks such as tariffs and oil prices, this type of inflation fundamentally stems from the expansion of investment demand. As long as AI capital expenditure remains high and the supply-demand contradiction is not resolved, the price pressure could persist.
For the Federal Reserve, this inflation data has somewhat alleviated short-term pressure for rate hikes. Some officials who had previously been open to rate hikes, such as Christopher Waller, may choose to wait and see. However, with the Fed, led by Kevin Warsh, having weakened forward guidance, strong employment or inflation data in the future could quickly reignite market expectations for rate hikes. Looking at a longer timeframe, if the main source of future inflation shifts from supply shocks to demand expansion, the duration of inflation could be extended accordingly. Compared to supply-driven inflation, demand-pull inflation also requires more attention from policymakers.
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