Rate Cuts Are Still on the Table—Even with a Higher CPI

• EIA data showed gas price dropped 10% year-over-year in July.

• NAR data shows house price growth continues to slow.

• The real rate of interest shows 170 basis points of rate cut cushion.

The headlines will scream ‘inflation rising’—but the Fed’s playbook isn’t changing…

This week’s CPI release is more than just another data point—it’s a litmus test for monetary policy flexibility. While the Cleveland Fed’s nowcast suggests a modest 0.2% month-over-month gain, the year-over-year pace could tick up to 2.8%, nudging higher from June’s 2.7%.

But context matters: last July’s CPI was a mere 0.1%, one of the weakest prints in the past year. That low base effect means even a modest monthly gain will mechanically lift the annualized rate.

As the new number for this year comes out, last July’s data will drop from the annualized total. We would need to see the same result as last July—or no growth at all—for inflation to hold steady or decline. In other words, the predicted 0.2% gain will cause the annualized pace of growth to accelerate. And it would be slightly higher than the typical July outcome we’ve seen over the past 25 years.

Yet, based on the predicted outcome, the data is unlikely to sway the Federal Reserve’s interest rate decision in September. Based on the numbers I’m looking at, the Fed should still have plenty of room to lower rates in September and throughout the balance of the year—even if inflation rises slightly. That ability to continue providing economic support should underpin a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

Gas Prices:

The chart below shows Energy Information Administration’s (“EIA”) monthly gasoline price data, covering all grades of gasoline. I use this measure because not everyone buys the same type of fuel. Looking at the full picture gives a better sense of how price changes affect everyone’s budget, not just one group.

Gas prices dropped sharply in July compared to last year. The average cost per gallon was $3.25, down from $3.60 in July 2024—a 10% decline.

Historically, gas prices rise in early spring. April sees the biggest jump with an average increase of 6.8%. Growth slows to 6.2% in May, then gradually declines for the rest of the year.

In 2025, gas prices have been under pressure since January. They barely dipped early in the year, but the decline has gained momentum. After a brief rebound in June, it appears the pace of price contraction is accelerating again.

That’s important because gas prices tend to be a leading indicator of headline CPI. If costs are rising elsewhere due to tariffs, this downdraft could help keep a lid on overall price growth.

House Prices:

As I’ve continued to highlight, house price growth is slowing. That’s important because shelter accounts for 35% of CPI. Owners’ equivalent rent (what people think they can rent their homes for) is 26% and rent of primary residence is 7.5%. So clearly, housing prices play a big role.

The latest figures from the National Association of Realtors (“NAR”) show continued easing in the pace of existing home sales price growth…

According to the NAR, the median existing home sales price in June was just over $435,000. That’s an increase of just under 2% year-over-year compared to 1.3% last month and 25% in June 2021. In fact, this past month experienced the third consecutive month of sub 2% annualized price growth. That hasn’t happened since early 2023, when the Federal Reserve signaled its intent to start slowing the pace of rate hikes.

Prices Received:

This next chart is a gauge I’ve built based on the manufacturing and services index data produced by regional fed banks every month. They asked businesses in their districts about whether activity is increasing, decreasing, or staying the same. They then produce indexes to gauge the level of change.

I’ve combined data from the Dallas, Kansas City, New York, and Philadelphia surveys. These four regions account for roughly 25% of national economic output. For this chart, I focused on prices received, which is akin to CPI.

I weighted the sector breakdown to 65% services and 35% manufacturing to reflect CPI weightings. The 20.5 result for July is consistent with outcomes since March. During that time, monthly inflation growth figures have remained stable—supporting a 0.2% pace of growth for July.

Real Fed Funds:

Lastly, let’s assess how much room the central bank has to cut rates. We do this by observing the real federal funds rate, calculated by subtracting the pace of annualized inflation from the effective fed funds rate.

In June, the effective fed funds rate was roughly 4.4%, while headline CPI was 2.7%, yielding a real rate of interest of approximately 1.7%. If inflation picks up to 2.8% in July, the cushion would still be 1.6%.

That tells us the Fed could lower rates by 25 basis points at the next six to seven meetings before hitting zero. Historically, the Fed has managed the real rate of interest to -0.4%, suggesting even more cushion to ease policy.

Bringing It All Together:

At the end of the day, recent job revisions for May and June have complicated the Fed’s narrative. Policymakers have leaned on labor strength to justify holding rates but now face a dilemma… act soon or risk overcorrecting later.

Unless inflation accelerates sharply, the Fed has room to cut—and that flexibility should support a steady rally in the S&P 500.

Five Stories Moving the Market:

Nvidia and Advanced Micro Devices agreed to pay 15% of their revenues from Chinese AI chip sales to the U.S. government in a deal to secure export licenses; Nvidia plans to share 15% of the revenue from sales of its H20 AI accelerator in China, while AMD will deliver the same share from MI308 revenues – Bloomberg. (Why you should care – each management team has lowered its revenue outlook based on reduced sales in China)

President Trump’s team is reviewing new contenders to be the next chairman of the Federal Reserve, including former St. Louis Fed President James Bullard and former White House Economic Adviser Marc Sumerlin, according to senior administration officials – WSJ. (Why you should care – Bullard helped build one of the most prescient economic forecasting models while in charge of the St. Louis Fed)

Federal Reserve Governor Michelle Bowman said she favors three interest-rate cuts this year; Bowman said her view on easing had been reinforced by recent weak labor-market data – Bloomberg. (Why you should care – she urged her fellow policymakers to begin cutting at the Fed’s next meeting in September to avoid larger cuts down the road)

The commerce department has started issuing licenses to Nvidia to export its H20 chips to China, a U.S. official said, removing a significant hurdle to the AI bellwether's access to a key market – Reuters. (Why you should care – Nvidia had previously warned it would lose $8 billion of revenue in the July quarter due to the curbs)

American companies are repurchasing their shares at a record pace, boosting their balance sheets and fueling the U.S. stock rally; companies have announced $983.6 billion worth of stock buybacks so far this year, the best start to a year on record, according to Birinyi Associates data going back to 1982 – WSJ. (Why you should care – this should help to fuel earnings growth and stock market upside)

Economic Calendar:

Markets are Closed in Japan
Fed’s Bowman (Board Member) Speaks (Saturday)
Treasury Auctions $82 Billion in 13-Week Bills (11:30 a.m.)
Treasury Auctions $73 Billion in 26-Week Bills (11:30 a.m.)