July Core CPI Slows to 2.5% as Fed's September Rate Hike Case Fades

Q: If the labor market is cracking faster than expected, could the Fed be forced to cut rates instead of just pausing?

Yes—if the labor market deteriorates materially from here, the Fed could shift from a pause to cuts, but the current data still point more to holding rates steady than easing immediately. The case for a cut would rest on the Fed’s employment mandate. July payrolls fell by 23,000, prior months were revised down by 103,000, labor-force participation dropped, and wage growth slowed to 3.2%. That combination suggests labor demand is weakening and that the job market is no longer a major driver of inflation. Several economists said that if this kind of deterioration continues, cuts would have to be considered, not just a delayed hike. But the threshold for cutting is higher because inflation is still above target. Core CPI cooled to 2.5% year over year in July, and monthly core CPI rose 0.2%, which is encouraging. Still, the Fed focuses more on core PCE, which remains higher at 3.3% year over year. Officials including John Williams and Lisa Cook have indicated they want more evidence that disinflation is durable before loosening policy. That means the Fed is unlikely to cut on one weak jobs report alone, especially when some of July’s payroll weakness may reflect seasonal distortions in government and leisure hiring. For now, the most likely path is a September hold. A rate cut becomes more plausible if upcoming reports show repeated job losses, rising unemployment for the “right” reason rather than falling participation, and inflation continuing to cool toward 2%.

3 articles · Updated · Yahoo Finance · Aug 12

Core CPI rose 2.5% in July from a year earlier and 0.2% from June, matching forecasts and marking a second straight month of cooling inflation.
That reading strengthens expectations the Federal Reserve will keep rates unchanged in September, especially after July payrolls showed the economy lost 23,000 jobs.
Fed officials already leaning toward a hold have pointed to similar data thresholds: John Williams said monthly core readings of 0.2% or lower suggest inflation is moving toward the 2% target.
Energy volatility tied to renewed Iran tensions still threatens the outlook, leaving one more round of inflation data before the September FOMC meeting as the key test.