[Explainer] July US CPI Matched Forecasts at +3.4%, But the Fed Still Hasn’t Ruled Out a September Hike

Hey everyone, Hirokichi here.

Right on schedule, the July US Consumer Price Index (CPI) I flagged in my previous post covering the market ahead of the CPI release came out overnight Japan time on August 12. The numbers matched expectations, and stocks rallied on relief. But if you’re thinking “so the Fed is heading toward rate cuts now,” that’s actually not quite right. The Fed hasn’t fully ruled out a rate hike this year. Let’s walk through what the CPI report said and how markets reacted.

July CPI matched forecasts: +3.4% headline, +2.5% core

The Bureau of Labor Statistics (BLS) reported that the seasonally adjusted CPI rose 0.1% in July, putting the year-over-year rate at 3.4% — a slight cooldown from June’s 3.5%. Core CPI (which strips out volatile food and energy prices) rose 0.2% for the month and 2.5% year-over-year, also down from June’s 2.6%.

Breaking it down: food prices rose 0.1%, energy rose 0.3%, and shelter rose 0.1%. Nothing here was extreme — this was very much a “no surprises” report (Source: BLS, July 2026 CPI release).

Looking at the last few months, headline CPI has moved like this: +3.3% in March, +3.8% in April, +4.2% in May, +3.5% in June, and +3.4% in July. May’s 4.2% was the highest reading in roughly three years, so two straight months of cooling gave markets some relief that inflation may be peaking. Core CPI has followed a similar path, easing from 2.8% in March and April down to 2.5% in July.

Stocks rallied on the “no surprise” print — S&P 500 and Nasdaq both up

With CPI landing right where forecasters expected, US stocks breathed a sigh of relief and pushed higher.

The S&P 500 rose 0.26% to close at 7,748.50, while the Nasdaq Composite gained 0.54% to 26,588.49. AI-related names led the way, with CoreWeave and Super Micro Computer — both semiconductor and AI infrastructure plays — helping lift the indexes. The Dow Jones Industrial Average was roughly flat, slipping 0.04% to 53,770.27.

Personally, I think the fact that markets reacted so positively to an “uneventful” CPI print says a lot about how nervous investors had become about inflation reaccelerating. That also means the next surprise, whichever direction it comes from, could trigger an outsized reaction — so I wouldn’t get too relaxed here.

Why are we even talking about a “hike” instead of a “cut”? Chair Warsh’s hawkish tilt

This is the part I really want readers to understand. Through 2025, the dominant market narrative was “rate cuts are coming soon.” That has changed noticeably in 2026.

The reason is the stance of new Fed Chair Kevin Warsh, who took office in February this year (I covered his appointment in detail in this earlier explainer, “The Fed Has a New Face! Powell’s Legacy and What to Expect from New Chair Kevin Warsh”). At his first FOMC meeting as chair, Warsh held rates steady — but delivered a hawkish surprise, with 9 of 18 participants projecting a rate hike sometime in 2026. Behind this is the fact that tariff-related costs were increasingly passed through to consumers, pushing inflation sharply higher between March and May.

Because July’s CPI matched expectations, September rate-hike odds tracked by CME FedWatch (a probability gauge derived from interest-rate futures) fell from roughly 48% before the release to about 38% afterward. In other words, a hike hasn’t been taken off the table — the odds have just eased somewhat. Those odds can swing significantly with each new data point, so I wouldn’t read too much into any single day’s move.

USD/JPY choppy in the 159 range, with 160 in sight

In currency markets, USD/JPY whipsawed between roughly 158.70 and 159.20 around the CPI release. It moved sharply right after the print, but since the data matched forecasts, it settled back to roughly where it started, in the upper 158 range. Some market watchers now see 160 coming into view, and with the interest-rate gap between Japan and the US still in focus, the yen-weakening bias looks likely to continue for now.

What to watch next: the September FOMC and Jackson Hole

Between now and September, a few events are likely to move markets:

(1) This week’s July PPI (Producer Price Index) and July retail sales — these will show how much cost pass-through businesses are doing, and how resilient consumer spending remains.
(2) The Jackson Hole Economic Symposium, August 27-29 — this gathering of central bankers is where Chair Warsh’s remarks could offer clues about the Fed’s next moves.
(3) The September 15-16 FOMC meeting — alongside the rate decision, the Fed will release its “dot plot” showing participants’ rate projections, which tends to make September meetings especially volatile.

As an individual investor, I think it’s more useful to keep the big picture in mind — inflation appears to be past its peak, but it’s still well above the Fed’s 2% target — rather than reacting to every single data point.

Let’s keep at it, slow and steady. See you next time!

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* This article is for informational purposes only and does not recommend any specific investment. Please make investment decisions at your own responsibility.

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