US CPI data set to show inflation ticked up in July as tariffs push prices up

The US Consumer Price Index is set to rise 2.8% YoY in July, at a faster pace than June’s 2.7% increase.
The Fed is widely expected to cut the policy rate by 25 bps in September.
July inflation data could significantly influence the US Dollar’s valuation.

The United States (US) Bureau of Labor Statistics (BLS) will publish the all-important Consumer Price Index (CPI) data for July on Tuesday at 12:30 GMT.

Markets will look for fresh signs of how US President Donald Trump's tariffs are feeding through to prices. Therefore, the US Dollar (USD) could experience volatility on the CPI release, as the data could influence the Federal Reserve’s (Fed) interest rate outlook for the remainder of the year.

What to expect in the next CPI data report?

As measured by the change in the CPI, inflation in the US is expected to rise at an annual rate of 2.8% in July, having recorded a 2.7% increase in June. The core CPI inflation, which excludes the volatile food and energy categories, is forecast to rise 3% year-over-year (YoY), compared to the 2.9% acceleration reported in the previous month.

Over the month, the CPI and the core CPI are seen advancing by 0.2% and 0.3%, respectively.

Previewing the report, analysts at TD Securities said: “We expect the July CPI report to show that core inflation gained additional momentum. We look for goods prices to gather further steam, as tariff pass-through continues to materialize. The services segment will likely not help offset that momentum. We project headline inflation to go sideways in July despite a deceleration in food and energy.”

Economic Indicator

Consumer Price Index (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as The Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier.The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve (Fed) has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

How could the US Consumer Price Index report affect EUR/USD?

Heading into the US inflation showdown on Tuesday, investors remain convinced that the Fed will opt for a 25 basis points (bps) reduction in the policy rate in September. According to the CME FedWatch Tool, markets are currently pricing in about a 90% probability of a rate cut at the next meeting.

Latest comments from Fed officials point to a difference in opinion on the inflation outlook. Atlanta Fed President Raphael Bostic warned that rising price pressures over the next six to twelve months could intensify the Fed’s challenges.

Conversely, St. Louis Fed President Alberto Musalem argued that it is likely that most of the impact of tariffs on inflation will fade. On a more dovish note, Fed Governor Michelle Bowman said recently that the latest weak labor market data strengthened her confidence in her own forecast that three interest rate cuts will likely be appropriate this year.

Although the July inflation data by itself might not be influential enough to sway the market expectation for a Fed rate cut in September, it could still have an overall impact on the policy outlook for the rest of the year.

The CME FedWatch Tool shows that there is about a 45% probability that the Fed will lower rates three times this year. A soft headline inflation reading of 2.6%, or lower, could feed into expectations of three rate cuts and weigh heavily on the US Dollar (USD) with the immediate reaction. On the other hand, a print above the market consensus of 2.8% could support the currency.

In case the headline print arrives at the market expectation, investors could react to the core inflation readings, more specifically to the monthly one. A monthly core CPI print of 0.4%, or higher, could be supportive for the USD.

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains:

“The near-term technical outlook points to a neutral bias for EUR/USD. The Relative Strength Index (RSI) indicator on the daily chart moves sideways slightly above 50 and the 20-day and the 50-day Simple Moving Averages (SMAs) converge slightly below the price.”

“While EUR/USD remains above 1.1600-1.1620 (static level, 20-day SMA, 50-day SMA), technical buyers could remain interested. In this scenario, 1.1700 (static level, round level) could be seen as an interim resistance level before 1.1830 (July 1 high) and 1.1900 (static level, round level).”

“Looking south, the Fibonacci 23.6% retracement of the January-July uptrend aligns as the first support level at 1.1440 before 1.1400 (100-day SMA) and 1.1200 (Fibonacci 38.2% retracement).”

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.