July Inflation US - Annual
I expect July annual CPI to remain above 3.1%, with a modest chance that a favorable base effect and another weak monthly print push it to the threshold or below. The market’s very low Yes price looks directionally right, though I think the Yes side is a little more plausible than the price implies.
Analysis
The latest official inflation data still leaves the market’s threshold out of reach by a meaningful margin. June CPI was 3.5% year over year, and getting to 3.1% in July would require a sharp additional improvement in just one month. That is not impossible, but it is a materially larger move than the market has seen recently, especially since the June drop already reflected an unusually favorable monthly print and some easing in headline energy-related components.
The strongest argument for a lower July reading is the recent disinflation trend in monthly data. June headline CPI fell 0.4% month over month, which is a large decline by recent standards, and core inflation also looked better than the prior pace. If July repeated another soft monthly outcome, the annual comparison could compress faster than expected, especially if the July 2025 base was relatively high. That said, the move from 3.5% to 3.1% is still a large enough step that it would probably need both a benign monthly report and a supportive base effect, rather than just one of those conditions.
The case against Yes is stronger because inflation remains sticky in the broader data flow. Even though headline CPI and PCE eased in June, both were still above the market threshold, and core measures were not close enough to guarantee a rapid glide toward 3.1%. Services inflation, shelter, and other persistent categories have historically been harder to cool quickly, and one or two favorable prints can be offset by a small rebound in categories that are volatile month to month. In other words, the trend is improving, but the level is still too high for a low-probability Yes outcome to be the base case.
The current market price is consistent with that view and may even be slightly conservative on the Yes side. A 2.45% implied probability suggests traders think the threshold is almost out of reach, which makes sense if they expect July to come in near the mid-3% range. My own assessment is that the chance of 3.1% or less is low but not negligible, because the latest inflation trajectory is finally moving in the right direction and the report only needs one favorable month plus a decent base effect to surprise lower.
Arguments
For
- Arguments for Yes: June showed unusually strong disinflation, so a second soft month could pull the annual rate down faster than expected.
- Arguments for Yes: If the July 2025 comparison base was elevated, the year-over-year figure could cross 3.1% even without a dramatic new monthly decline.
Against
- Arguments against Yes: The latest official reading at 3.5% is still too far above 3.1% for a one-month improvement to be the most likely outcome.
- Arguments against Yes: Sticky categories such as shelter and services often prevent headline inflation from falling as quickly as headline momentum suggests.
Key drivers
- June’s large monthly CPI decline creates some momentum for another low annual print.
- The July 2025 base effect could materially affect the year-over-year calculation.
- Persistent services and shelter inflation make a sharp one-month drop difficult.
Risk factors
- A small rebound in gasoline, shelter, or core services could keep the annual rate above 3.1%.
- The market may be underestimating how much additional cooling is needed from 3.5% to reach the threshold.
Scenarios
Best case
July CPI gets another weak monthly print, energy and goods prices stay soft, and the year-over-year rate drops to 3.1% or even slightly below on a favorable base effect.
Most likely
Inflation cools somewhat or stays roughly stable, but not enough to clear the threshold, so the July annual CPI lands in the low-to-mid 3% range and No wins.
Worst case
Inflation reaccelerates modestly in July, or sticky services and shelter offset prior improvements, leaving annual CPI clearly above 3.1%.
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