Inflation Falls for 2 Months Straight — Is a Fed September Rate Hike Still on the Table?

• CME FedWatch odds of a September rate hike dropped from 55% before the CPI release to 32% after both inflation reports, as headline CPI cooled to 3.4% annually from 3.5% in June
• Average monthly crude oil prices fell from $80.38 to $79.32 per barrel in July despite Strait of Hormuz tensions, but retail gasoline has since climbed from $3.87 to $4.07 per gallon, potentially impacting August's data
• The Fed is now genuinely data-dependent under Warsh, meaning every CPI and PPI release before the September 18 meeting will trigger volatility for rate-sensitive assets and long-duration bonds

Market Summary: Inflation Eases, Fed Rate Hike Odds Plummet

Key Developments

Inflation Data: July CPI rose just 0.1% month-over-month, pulling the annual rate down to 3.4% from June's 3.5%. The Producer Price Index remained flat for the month, with the annual rate cooling to 4.7% from 5.5%. This marks the second consecutive month of declining inflation rates, though still well above the Fed's 2% target.

Fed Policy Implications: The cooling data dramatically shifted market expectations. CME FedWatch probability of a September rate hike plummeted from 55% before the CPI release to 32% following both reports. The September 18 Fed meeting date is now critical for rate-sensitive assets.

Energy & Cost Pressures

Despite geopolitical tensions near the Strait of Hormuz causing crude oil spikes, monthly average oil prices fell from $80.38 to $79.32 per barrel in July. Gasoline prices dropped 2.9% in the month measured, but have since risen from $3.87 to $4.07 per gallon by early August, creating potential upward pressure for August's report.

Electricity costs surged from $177 to $217 for average residential bills due to peak summer cooling demand, though per-kilowatt-hour rates remained stable around $0.19-$0.21.

Market Context

Under Fed Chair Kevin Warsh, monetary policy has become genuinely data-dependent, meaning each inflation release will trigger significant volatility. Investors holding long-duration bonds and rate-sensitive sectors should expect continued turbulence through September. The prudent approach is recognizing uncertainty rather than betting heavily on either policy outcome.

Warning: One cooling month doesn't establish a trend, and energy market dynamics could reverse the favorable trajectory in upcoming reports.