Inflation’s Plot Twist Keeps Rate Cuts in the Cards
Inflation took a turn in July 2025, and while the numbers didn’t shock the markets, they’re setting the stage for an interesting end to the year.
The headline 🔗CPI rose 0.2% in July and held steady at 2.7% year-over-year, just under the predicted 2.8%—a mild reprieve for consume
The 🔗core CPI, excluding food and energy, jumped 0.3% monthly—its largest climb since January—landing at 3.1% annually, up from June’s 2.9%. Housing, medical care, dental visits, and airfares (up 4%) were the biggest movers.
🔗Energy prices helped soften the blow, with gasoline down 2.2%, groceries unchanged, and overall food costs flat.
💹 Why This Is Market-Friendly—but Not a Free Pass
🔗Markets breathed a sigh of relief after the July CPI report, with the S&P 500 and Nasdaq notching fresh record highs and the Dow climbing over 400 points. Investors had been bracing for hotter inflation, so the modest headline number—paired with a contained increase in core prices—fueled optimism that the Fed will move ahead with a September rate cut. Probability estimates for that cut jumped to over 90% immediately after the data was released.
Still, the report wasn’t all good news. While headline inflation stayed steady, 🔗the uptick in the core rate is a reminder that pricing pressures—especially in service categories like housing and travel—remain sticky. Tariffs are quietly adding to costs in goods and services, but so far their impact has been manageable enough that most analysts believe the Fed won’t delay its plans. In other words, the market may be enjoying this latest inflation reading, but it’s keeping one eye on the scoreboard for any signs of trouble.
🔮 Predictions: Fed Rate Cuts Between Now and Year-End
Based on current CPI data, labor market trends, and Fed commentary, here’s the possible playbook:
September 2025: A 25-basis-point cut is widely expected (90%+ odds), aimed at cushioning a cooling job market. A more aggressive 50-point cut is possible if August jobs data shows sharp deterioration.
November 2025: If core inflation moderates and hiring slows further, a second 25-point cut could follow. If inflation surprises higher, the Fed may hold steady to avoid fanning price pressures.
December 2025: A third 25-point cut is possible if the economy shows signs of stalling—bringing total cuts to 50–75 basis points by year-end. But if inflation re-accelerates, the Fed could pause until 2026.
Bottom line: The base case is two cuts in 2025, but three isn’t off the table if growth softens faster than expected.
🔍 What to Watch
Over the next few months, the labor market will be the biggest variable in the Fed’s decision-making. If job growth slows further or unemployment starts to climb, pressure will mount for additional rate cuts before year-end. Weak hiring trends could tip the balance toward a faster and more aggressive easing cycle.
Tariff pass-through is another factor to keep an eye on. While the July data suggests their impact on prices is still manageable, businesses may gradually raise prices in the fall as they adjust to higher costs. A sharper jump in goods or services inflation could make the Fed more cautious about cutting too quickly.
Finally, core services inflation—particularly in housing, travel, and healthcare—will act as a litmus test for whether inflation is truly cooling. If these categories start to ease, it will give the Fed more confidence to lower rates. But if they remain stubborn, the path to multiple cuts by year-end could get bumpier.
🐼Final Word (With a Dash of Optimism)
Inflation is like that stubborn guest who lingers after the party—but at least they’ve moved closer to the door. Headline CPI is cool enough to justify cuts, and markets are betting on a soft landing with at least two rate moves before New Year’s Eve.
If the Fed balances inflation control with labor market support, we could see lower borrowing costs and stronger housing activity heading into 2026.
📣 Wondering how potential rate cuts this fall and winter could impact your mortgage options or real estate plans? Let’s map it out now—before the Fed makes its next move.
