Core inflation up, with more to come. But Wall Streeters think it opens the floodgates?

With businesses reporting higher costs from tariffs and other reasons in recent weeks, it brought INFLATION WATCH to another level. And made many look to today’s report on the CPI for July as a significant piece of data on the state of the economy, as well as the outlook for the future.

The consumer price index increased a seasonally adjusted 0.2% for the month and 2.7% on a 12-month basis, the Bureau of Labor Statistics reported Tuesday. That compared with the respective Dow Jones estimates for 0.2% and 2.8%.

Excluding food and energy, the core CPI increased 0.3% for the month and 3.1% from a year ago, compared with the forecasts for 0.3% and 3%. Federal Reserve officials generally consider core inflation to be a better reading for longer-term trends. The monthly core rate was the biggest increase since January while the annual rate was the highest since February.

Inflation numbers a little better than expected. But inflation numbers also showing signs of re-inflation, both tariff and possibly otherwise. Core annual rate: 1 month: 3.9% 3 months: 2.8% 6 months: 2.4% 12 months: 3.1%

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— Jason Furman (@jasonfurman.bsky.social) August 12, 2025 at 8:01 AM

Here are all the numbers. All of them highly elevated except headline--which benefited from a 2.2% decline in gasoline prices (seasonally adjusted).

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— Jason Furman (@jasonfurman.bsky.social) August 12, 2025 at 8:01 AM

It's largely in the core index where we would be more likely to see some tariff effects, and some household goods are showing increases. But it does not yet appear to be leading to widespread price increases through the entire economy.

Tariffs did appear to show up in several categories.

For instance, household furnishings and supplies showed a 0.7% increase after rising 1% in June. However, apparel prices were up just 0.1% and core commodity prices increased just 0.2%. Canned fruits and vegetables, which generally are imported and also sensitive to tariffs, were flat.

“The tariffs are in the numbers, but they’re certainly not jumping out hair on fire at this point,” former White House economist Jared Bernstein said on CNBC. Bernstein served under former President Joe Biden.

So with the core CPI creeping back above 3%, and with the traditional thought being that the Fed cares more about core indexes than the overall increase in prices, you’d think the CPI report might draw some concerns. But instead Wall Streeters boosted their hopes about looser monetary policy.

Expectations for lower rates soared following the report. Traders are now pricing in a nearly 91% chance of a rate cut next month, per trading data from the CME’s FedWatch Tool. That’s up from a 85% chance before the data release. Traders also increased their bets on rate cuts in October and December.

“It looks like a bit of Goldilocks right now for the stock market,” said Tom Hainlin, national investment strategist at U.S. Bank Asset Management Group. “More and more people are expecting a rate cut in September. So, rates kind of on a downward bias, earnings on an upward bias — that’s a pretty good environment for the broad stock market.”

Well, it's those two things, or the traders are in a delusional Bubble of BS that bursts as soon as job losses confirm that we are in stagflation, or we see even more inflation if the economy somehow picks up in the next few months.

And better profits? With higher tariff costs? Well, layoffs and non-hiring might be good for corporate profits, I suppose (along with stock manipulation and buybacks).

I’ll also note one area of the July CPI report that had sizable price increases – medical care.

1-month change prices, July 2025
Health Insurance +0.4%
Overall Medical Care Services +0.8%
Physicians’ Services +0.2%
Dental Services +2.6%
Hospital Services +0.5%
Nursing Home/Adult Day Services -0.1%

12-month change prices, July 2025
Overall Medical Care Services +4.3%
Health Insurance +4.4%
Physicians’ Services +3.1%
Dental Services +4.8%
Hospital Services +5.7%
Nursing Home/Adult Day Services +4.7%

That’s generally the “full-price” cost of services, much of which is defrayed for people by the health insurance they carry. And that’s an important caveat, because there are a lot of Americans who will be losing their health insurance and have to pay that full price for health care services very soon.

New from CBO: year-by-year health coverage effects of the "Big Beautiful Bill." The law kicks 10 million off their health insurance (the difference between the orange and dotted blue line). It also does nothing to address the cliff from the blue to the green, for another 5 million losing coverage.

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— Bobby Kogan (@bbkogan.bsky.social) August 11, 2025 at 1:15 PM

And even if people still get their insurance from the ACA exchanges, the most recent estimation by the Kaiser Family Foundation has Obamacare Exchange insurance going up by a median of 18% for next year, and if you’re in the group of people whose tax credits are going away, KFF says your out-of-pocket costs will nearly double.

For subsidized enrollees in states using Healthcare.gov, premium payments average about $672 per year in 2024 ($56 per month). Without enhanced subsidies, the average annual premium payment would rise by 93% ($624) to $1,296.

So the 4-6% inflation we are already seeing in health-related costs is likely to head higher than that for tens of millions of Americans soon.

While I don’t think that the current level of 2.7% overall inflation and the 3.1% core rate is a major economic problem in itself (though you don't want any more than that), I also think it is absurd that coked-up Wall Streeters think this situation would lead the Fed Funds rates to get dropped to 2.5%-3% vs the 4.25%-4.5% range it’s in today. And it seems especially dumb to think the rate cuts would continue as health insurance costs and tariff effects will likely take inflation higher at the end of the year than what we have today.