US Inflation Data Surprises with Decline, Shattering September Rate Hike Bets

US July inflation data failed to beat expectations for the third consecutive time; the Consumer Price Index came in at 0.1% month-on-month (+3.4% year-on-year), while its core index registered 0.2% month-on-month, below the expected 0.3%. The core Producer Price Index then came in below expectations on Thursday, before retail sales data surprised on Friday with a 0.6% contraction.

This sequence resulted in the collapse of bets on a September Fed rate hike; after the probability of keeping rates unchanged stood at no more than 52% prior to the CPI release, it rose to 64% in its wake according to the CME FedWatch tool, and continued to rise with the series of weaker-than-expected PPI and retail sales data.

Regarding CPI components, rent accounted for two-thirds of the monthly index rise, while energy prices plummeted 1.5% month-on-month despite remaining 14.7% higher year-on-year due to the repercussions of the Hormuz crisis. A report by Morningstar noted that inflation is "heading in the right direction despite the previous energy shock," citing labor market weakness as justification for the Fed to pause.

The declining prospects of a rate hike revived investors' appetite for safe havens, sending gold and silver higher in Friday's evening session, supported by a softer dollar and reduced interest rate bets. The triple sequence—CPI, PPI, and retail sales—indicates that the post-Hormuz shock economy is self-reining, and that bets on rate hikes in 2026 are eroding with every round of data.

What do these terms mean?

Consumer Price Index (CPI): The most famous measure of inflation in the United States, tracking the cost of a typical basket of goods and services, published monthly by the Bureau of Labor Statistics.

Producer Price Index (PPI): Measures changes in prices received by domestic producers for their output, serving as an early indicator of consumer inflation pressures.

Core Index: An adjusted version of the inflation index that excludes food and energy prices to obtain a clearer picture of the underlying inflationary trend.

Retail Sales: A monthly indicator tracking total sales across US retail stores, reflecting the strength of consumer spending, which accounts for about 70% of gross domestic product.

FedWatch Tool (CME): A tool by the CME exchange to track probabilities of changes in US interest rates, derived from interest rate futures contracts.