July Inflation Data Lowers Probability of September Fed Rate Hike

The Federal Reserve System faces decreasing pressure to raise interest rates at its September meeting following the release of July Consumer Price Index data. Core inflation fell to a joint five-year low of 2.5% year-over-year, while headline inflation eased to 3.4% year-on-year.

Energy prices remained a volatile factor, jumping 14.7% annually due to conflict involving Iran and the closure of the Strait of Hormuz. However, monthly energy costs declined by 1.5%, and gasoline prices dropped for a second consecutive month, preventing a persistent passthrough to core inflation. Analysts at Citi noted that these benign figures, combined with softer-than-anticipated July labor market data, support a non-hiking bias for the remainder of 2026.

Market expectations shifted rapidly as the data emerged. The probability of a September rate hike initially dropped to 38.1% following the report. By August 14, CME FedWatch indicated a 71% probability that the Federal Reserve will maintain current interest rates, leaving only a 28% chance of a hike.