July Inflation US - Annual
July inflation is still more likely to come in above 3.1% than at or below it. The recent disinflation trend is real, but the move required to clear this threshold looks larger than what current data and nowcasts suggest, so I assign a low single-digit chance to Yes.
Analysis
The starting point is unfavorable for Yes. June CPI was 3.5% year over year, and recent tracking data points to continued cooling but not a dramatic collapse in the annual rate. To resolve Yes, July needs to come in at 3.1% or less, which means the published figure must fall enough to clear a fairly tight threshold after one decimal rounding. That is possible if July monthly inflation is very soft, but it would require a notably better read than what most current indicators imply.
There are real reasons the rate could keep drifting down. Energy prices have been a major disinflationary force, and if gasoline and broader fuel costs stayed weak in July, they could shave enough from the annual comparison to matter. Some components also benefit from easier base effects, so even a moderate monthly CPI print could produce a larger year-over-year decline than many expect. The main issue is that the broader inflation backdrop still looks sticky enough that a clean drop below 3.1% would need several favorable component moves at once rather than just a single soft item.
The market is pricing this as an extreme long shot, and that generally fits the data. The recent June PCE figures were still elevated, core inflation has not fully broken lower, and commentary from the Fed continues to treat inflation as above target. My estimate is higher than the market’s, because rounding and base effects leave a small tail where the print sneaks under the cutoff, but the most likely outcome remains a July reading in the low-to-mid 3% range, which would still be a No.
Arguments
For
- Arguments for Yes: Continued declines in energy prices could cut enough from headline CPI to push the annual rate under the threshold.
- Arguments for Yes: Easier year-ago comparisons and a soft monthly print could combine to produce a lower-than-expected rounded result.
Against
- Arguments against Yes: June inflation was still 3.5%, so the required drop is large relative to the recent pace of cooling.
- Arguments against Yes: Core inflation remains sticky enough that headline CPI is more likely to settle above 3.1% than below it.
Key drivers
- June CPI at 3.5% leaves a meaningful gap to the 3.1% cutoff.
- Energy prices and other volatile categories could pull the July annual rate down faster than core inflation.
- One decimal rounding creates a small tail where an actual print just under 3.15% resolves as 3.1%.
- Nowcasts clustered around the low 3% range suggest some improvement but not enough for a clear Yes.
Risk factors
- A rebound in gasoline or other energy prices could stop the annual rate from falling enough.
- Sticky shelter and services inflation could keep core pressure elevated and limit headline disinflation.
- If July monthly CPI is merely average instead of unusually soft, the year-over-year rate likely stays above 3.1%.
- The market may be underestimating how hard it is to get from 3.5% to 3.1% in one report.
Scenarios
Best case
Energy costs stay weak, shelter and services cool more than expected, and the July CPI print lands at 3.1% or 3.0% after rounding, producing a Yes outcome.
Most likely
Inflation eases modestly from June but remains above the cutoff, with July CPI landing around the low-to-mid 3% range and No winning comfortably.
Worst case
Gasoline or other volatile components rebound and core categories stay firm, leaving annual CPI in the mid-3% range and clearly resolving No.
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