In July 2025, the US Consumer Price Index (CPI) saw a yearly rise of 2.7%, just short of the expected 2.8%. The core CPI, which excludes food and energy, increased by 3.1% year-on-year, slightly above the anticipated 3.0%. The monthly CPI met expectations at 0.2%, with an exact figure of 0.197%. The core CPI for the month was 0.3% (or 0.322% unrounded), also in line with expectations. Real weekly earnings rose by 0.4%, bouncing back from a previous drop of 0.3%. Some notable price changes included a 2.3% increase in coffee prices and a 0.9% rise in furniture and bedding. Used cars and trucks gained 0.5% in price, recovering from a 0.7% drop the month before. On the downside, motor fuel prices fell by 2.0%, while fresh fruits dropped by 1.4%.

Stock Market Reaction

The stock market responded well, with the Dow rising by about 200 points, the NASDAQ gaining 120 points, and the S&P increasing by 43 points. Yields saw a slight decline, with the two-year yield dropping by 3 basis points to 3.716%, and the ten-year yield decreasing by 1.1 basis points to 4.261%. Following this report, the likelihood of a rate cut in September rose to 90%, up from 85%. There are also expectations for 60 basis points of cuts by the year’s end. Today’s July inflation report from August 12, 2025, indicates that the initial market reaction may have been too optimistic. While the overall inflation number cooled slightly, core year-over-year inflation ticked up to 3.1%, surpassing expectations. This persistent inflation, driven by a 0.4% monthly rise in services, is a concern for the Federal Reserve. This situation feels similar to the first half of 2024 when ongoing services inflation delayed the Fed’s shift in policy. The strong 0.4% rise in real weekly earnings could raise concerns that consumer demand is too robust for the Fed to comfortably return to its target rate of 2%. Therefore, caution is advised regarding the market’s optimistic view on rate cuts. For derivative traders, the decline in the 2-year yield to 3.71% presents an opportunity to prepare for a possible market reversal. The market currently indicates a 90% probability of a rate cut in September, but mixed data gives Fed officials ample reason to temper those expectations at the upcoming Jackson Hole symposium in late August. Buying options that profit from rising short-term rates may be a wise protection against potential hawkish surprises.

Equity Market Concerns

In equity markets, the rally in the S&P 500 and NASDAQ is based on the expectation of lower interest rates, but this assumption may be unstable. The CBOE Volatility Index (VIX) has likely dropped due to this news, now trading around a low 14, indicating some complacency among investors. This environment could be ideal for buying protective put options on major indices at lower prices to hedge against downturns. Also worth noting is the weakness in categories like motor fuel and appliances, which could suggest a softening in consumer spending on certain goods. This may affect the outlook for related retail stocks. Conversely, the unexpected strength in used cars and tools might indicate that tariffs are affecting the economy, which could complicate the inflation landscape in the coming months. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now