July Inflation US - Annual

The latest inflation backdrop does not point to a decisive break lower. Recent readings showed disinflation slowing rather than accelerating, with both headline and core price measures still well above the Fed’s target, so the market is asking for a fairly specific and somewhat favorable July outcome to get to 3.1% or below. Because the BLS reports CPI to one decimal place, the July print has to be weak enough not only to improve, but to round down into the threshold band.

The main arithmetic challenge is the year-over-year comparison base. Even if July’s month-over-month CPI comes in tame, the annual figure only falls meaningfully if the current month is weak relative to the same month last year, and the recent commentary suggests July 2025 was not an unusually easy comparison. That means a normal soft print could leave the annual rate stuck in the low 3s instead of slipping cleanly to 3.1 or lower.

Market pricing is extremely skeptical of a yes outcome, and that skepticism is understandable because the recent inflation trend still looks sticky in shelter, services, and core categories. The biggest path to yes is a notable drop in gasoline and broader energy prices that pulls the headline measure down more than expected, but that would need to be strong enough to overcome stubborn underlying inflation. My read is that the yes side is possible but clearly a tail scenario, with the no side still much more likely than the market’s very low yes probability implies.