The Atlanta Fed’s sticky-price consumer price index (CPI) rose by 4.6 percent on an annualized basis in July, up from 4.3 percent in June. Comparing year-over-year, this index shows a 3.4 percent increase. When we exclude food and energy, the core sticky-price index increased by 4.8 percent annually in July, consistent with a 3.4 percent gain over the past year. Meanwhile, the flexible segment of the CPI dropped by 3.8 percent in July compared to last year but still reveals a 0.8 percent increase year-over-year.

Ongoing Inflationary Pressures

The sticky-price index highlights ongoing inflation concerns, which economists are closely watching. The changes in both sticky and flexible price indices illustrate different inflation trends in the economy. Underlying inflation remains stubborn, with sticky prices rising at a 4.6% annual rate in July. This contrasts with declining flexible prices, making monetary policy decisions more complicated. The fight against inflation is not over, even with some signs of improvement. The Federal Reserve is likely worried about the 4.8% annual increase in core sticky prices. Along with the July 2025 jobs report, which showed nonfarm payrolls exceed expectations at 215,000, there’s a strong case for a continued hawkish approach. Policymakers will likely stress the need for persistent inflation to decline before considering any easing of policies. In light of this, interest rate markets are adjusting their expectations for future policies. The chance of a 25-basis-point rate hike in the September 2025 meeting has risen to over 40%, according to CME FedWatch data, increasing from just 15% two weeks ago. Traders are moving away from bets on rate cuts and preparing for a prolonged higher interest rate environment.

Historically Low Inflation Periods

We recall the inflation spike in 2022, where persistent services inflation led to a more aggressive Fed response. This historical context shows that waiting for sticky inflation to decrease naturally can lead to sharper policy changes later. It warns us not to underestimate the Fed’s determination this time. Given this outlook, we should look for strategies that take advantage of sustained or rising short-term interest rates and increased market volatility. Options on interest rate futures, like those linked to SOFR, could be valuable in positioning for a hawkish Fed. Volatility indexes may also rise as policy uncertainty escalates in the coming weeks. Create your live VT Markets account and start trading now.

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