Consumer-price index is critical to what the Warsh-led Fed does next
High inflation has made Americans think twice about what they buy.
A surprising decline in U.S. jobs last month isn't enough to discourage the Federal Reserve from raising interest rates soon, but a tame inflation report for the second straight month could do the trick.
That's why the July consumer-price index due out Wednesday is a big deal. Waning inflation would keep the Fed on hold, but another troubling rise in prices would likely trigger an increase in borrowing costs next month.
Up or down
Consumer prices probably rose a scant 0.1% in July after declining in June for the first time in six years, according to a poll of economists by the Wall Street Journal.
The yearly increase in inflation would slow to 3.4%, down from 3.5% in June and from a three-year high of 4.2% in May.
If that was the end of it, the Fed would have little reason to raise rates.
It's more complicated, though. A sharp drop in gas prices in the first half of the month will depress the headline increase in the CPI.
What matters is the overall trend in inflation - and the trend isn't great.
'Core' of the problem
The more important measure is what's known as the core rate of inflation. It strips out volatile energy and food costs and gives a better sense of the true rate of inflation. This is the number the Fed will key in on.
The core CPI is projected to increase a modest 0.2% in July. That's enough to keep the Fed on high alert, economists say, but not enough to seal the deal for a rate hike.
The yearly rate of core inflation, meanwhile, would slide to 2.5% from 2.6%. Even so, inflation would still be running notably above the Fed's 2% target for sixth year in a row.
The elevated rate of inflation, however, doesn't guarantee a rate hike this year.
"The prevailing narrative is that inflation remains damningly high, but 2.5% is not that far from the Fed's 2% goal," said Bob Edwards, chief investment officer at Edwards Asset Management. "It is not victory, but it is progress."
Devil in the details
So what is the Fed supposed to think? Central bank officials will dig deep into the report for evidence about what's really going in the economy.
They will pay particular attention to the cost of services such as rent and transportation, the biggest source of high U.S. inflation.
Service prices have risen 3.2% in the past 12 months, up from 2.9% at the start of 2026.
The problem isn't so much that inflation is on the rise again - much of the increase this year is tied to higher oil prices and the residual but fading effect of the Trump tariffs. Energy prices are likely to decline once the Iran conflict finally ends.
The bigger issue is that the true rate of inflation appears stuck at 2.5% or higher. And there's little sign it will subside without any Fed intervention.
That's why three voters on the Fed's rate-setting board dissented last month in favor of a rate increase. They lost in a 9-3 vote.
"Even a low CPI print ... might not be enough to negate the concerns of the Fed's hawks, which seem to focus on the durability of above-target inflation for the past four years," wrote Thierry Wizman, global money and rates strategist at Macquarie Group.
Fed Chairman Kevin Warsh has vowed to bring inflation down, but his tough talk hasn't been backed up by any action. Wall Street is growing increasingly suspicious that there's little bite to his bark.
Whatever the case, higher interest rates also have side effects. They would slam an already depressed housing market suffering from record prices and nearly 7% mortgage rates. They could also dampen other forms of consumer and business borrowing.
Close call ... for now
What would make the Fed's decision more clear is a black-and-white outcome in the CPI: either another benign inflation reading or a bigger increase than expected.
A soft inflation report could keep the Fed on hold until at least October, especially after the government on Friday reported the first decline in U.S. employment in six months.
A larger core CPI increase of, say, 0.3% or more likely 0.4% would do the opposite. Wall Street expectations for an interest-rate hike at the Fed's next big meeting in mid-September would skyrocket.
Right now Wall Street DJIA SPX traders are penciling in a 48% chance of a rate hike.
Also keep a close eye this week on wholesale inflation via the producer-price index. The CPI and PPI might not carve a Fed rate hike in stone, but they could be the biggest building blocks.
-Jeffry Bartash
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