Takeaway: Rates will fall today after an unexpectedly soft CPI inflation reading that will keep the Fed from hiking at the July 29th meeting.

• Overall headline inflation came in at -0.4% month-over-month (3.5% annual) in June due to energy price declines. Leaving out food and energy prices, core inflation came in at 0.0% month-over-month (2.6% annual).
• Forecasters had been expecting a monthly decline of 0.19% on overall inflation and a monthly increase of 0.21% on core inflation. This is an unusually large miss on forecasting inflation. The last time forecasters erred by so much in recent memory was in fall 2025 when the Bureau of Labor Statistics unexpectedly chose to assume zero shelter inflation during the government shutdown, which artificially reduced overall and core inflation. On first blush, there does not appear to be anything suspicious in today’s data.
• Apart from the decline in energy prices, which were expected, no specific category played an outsized role in today’s unexpectedly soft data. Lower price increases were largely across the board. Shelter prices, the largest category in CPI, increased just 0.1% monthly when it is usually in the 0.3% range. The services categories overall were flat at 0.0% monthly after averaging 0.3% monthly the last few months. Goods prices were also generally cool, declining 0.1% monthly overall and apparel prices declined 0.6% monthly.
• The PCE inflation data that will be released later in the month and that the Fed prefers to use over CPI might still come in higher. Tomorrow’s PPI release will provide the rest of the data that allows forecasters to predict PCE fairly precisely.

• Given the recent commentary of Fed officials and last week’s FOMC meeting minutes, markets had become worried that a rate hike could come as soon as the July 29th meeting. Futures markets had the odds at close to 50% yesterday.
• After today’s data, the Fed will be unlikely to hike. Based on recent commentary, they should push off the hikes as they continue to monitor inflation and labor market data.
• Fed chair Kevin Warsh will be testifying before the Housing Committee on Financial Services today at 10am ET. His first Fed meeting in June made it clear that he will not want to comment much, if at all, on the future path of monetary policy and how the committee will make decisions, but his comments will still be scrutinized.

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