Consumer inflation eased in July, providing the Federal Reserve with a fresh round of data to stay patient on the decision of whether to raise interest rates. The bond market remains skeptical, but yesterday’s (CPI) for last month, along with readings from alternative CPI benchmarks, suggests that pricing pressure is, at worst, stabilizing if not easing. Looking ahead to the next update, a pair of CPI nowcasts for August point to ongoing disinflation this month.
The main risk factor is (still) Iran, but if the conflict remains relatively calm, the foundation for a softer pricing trend appears to be in place.
Let’s start with the standard CPI data on a rolling one‑year basis. Headline and core measures eased in July, suggesting that the war‑driven inflation spike has peaked. Notably, continues to moderate, dipping to a 2.5% year‑over‑year pace, which matches the pre‑war trend in January and is close to the Fed’s 2% target.
Three alternative measures of CPI (published by the and Atlanta Fed) that attempt to minimize noise and emphasize the inflation signal also highlight ongoing disinflation through July.
The one‑year trend in wages is also pointing to disinflation. Combined with the sluggish increase in private‑sector payrolls lately, this data suggests that the labor market’s influence on near‑term inflation is easing.
The Cleveland Fed’s nowcast for CPI in August indicates that disinflation will continue in the next update.
The Capital Spectator’s proprietary nowcasting model for core CPI also highlights ongoing disinflation for the near term. This model’s estimates have been generally correct in recent months in terms of nowcasting the directional bias (see here, for example). The fact that the August outlook mirrors the Cleveland Fed’s nowcast strengthens the case for anticipating that inflation pressure will ease further.
Another proprietary model run by The Capital Spectator also points to softer inflation pressure after the spike earlier in the war. The Inflation Pulse Index aggregates the 12‑month percentage changes for all 32 components of the Consumer Price Index and scores each benchmark. The master score — the Inflation Pulse Index — reflects the overall inflation bias. Readings range from 0 (a strong disinflation/deflation bias) to 1.0 (a strong inflation bias).
There are several caveats to consider that could spoil the disinflationary party. In addition to the uncertainty surrounding the Middle East conflict, the bond market remains skeptical that inflation risk is easing. , for example, rose yesterday to 4.70%, trading near its highest level since early 2025.
Until the bond market is persuaded that the worst of the war‑related inflation threat has passed, and that disinflation is the path of least resistance, the outlook for will remain unsettled. Although yesterday’s CPI data looks encouraging, if only on the margins, the Federal Reserve does’t operate in a vacuum and will remain in a tug-of-war with bond yields for setting monetary policy.