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Underlying U.S. inflation accelerated to the strongest since the start of the year, but a tepid rise in goods prices tempered concerns about tariff-driven pressures. 

“Inflation is on the rise, but it didn’t increase as much as some people feared,� said Ellen Zentner at Morgan Stanley Wealth Management. “In the short term, markets will likely embrace these numbers because they should allow the Fed to focus on labour-market weakness and keep a September rate cut on the table.�

With risks to the labour market rising, the Fed would likely tolerate temporarily higher-than-expected inflation prints — provided that the risk of second-round effects remains contained and price expectations stay well-anchored, said Marco Casiraghi at Evercore.

“I think the real thing now to think about is should we get a 50 basis-point rate cut in September,� Treasury Secretary Scott Bessent told Fox Business. He said the Fed could have cut rates in June or July if they’d had the “original� jobs reports numbers.

For equities, renewed bets on lower rates added to a rally driven by persistent enthusiasm over artificial intelligence and strong corporate earnings.

“Stocks can continue to move higher, and it is going to take a much larger inflation number – or other shock to the market – for a correction to commence,� said Chris Zaccarelli at Northlight Asset Management.

The core consumer price index, which excludes the often volatile food and energy categories, increased 0.3% from June, the strongest pace since the start of the year. That was in line with economists’ forecasts, as was the overall CPI on a monthly basis.

“This data, together with recent consumer surveys show moderating inflation expectations and slowing labour market momentum, provides a reasonable backdrop for the Federal Reserve to begin rate normalization in September, even if year-over-year inflation remains above target,� said Tiffany Wilding at Pacific Investment Management Co.

U.S. officials have kept rates unchanged this year in hopes of gaining clarity on whether tariffs will lead to sustained inflation. At the same time, the labour market — the other half of their dual policy mandate — is showing signs of losing momentum.

In a social media post, President Donald Trump resumed his criticism of Jerome Powell over the central bank’s decision to hold rates steady. Trump also said he is weighing a lawsuit against the Fed chief over the renovation of the central bank’s headquarters - a project whose cost overruns have drawn scrutiny. 

EJ Antoni, Trump’s pick to lead the Bureau of Labor Statistics, has suggested suspending the agency’s monthly jobs reports and publishing only quarterly numbers until issues with data collection are corrected.

Fed Bank of Richmond President Tom Barkin said uncertainty over the direction of the economy is decreasing, but it’s unclear whether the central bank should concentrate more on controlling inflation or bolstering the job market.

“The Fed’s policy stance is highly data-dependent, and with inflation contained and labour market softness increasingly evident in revised payroll data, the emphasis will now be skewed toward employment,� said Alexandra Wilson-Elizondo at Goldman Sachs Asset Management. “This inflation print supports the narrative of an insurance rate cut in September, which will be a key driving force for the markets.�

To Skyler Weinand at Regan Capital, Tuesday’s CPI data was tame enough that it gives the Fed the green light to cut rates by at least 25 basis points in September and opens the possibility of a larger 50 basis point cut.

“Inflation remains under control for the moment, which means the risks are tilting toward the Fed’s full employment mandate,� said Jason Pride at Glenmede. “The stars appear to be aligning for a September rate cut.�

Neil Dutta at Renaissance Macro Research said the market reaction to today’s data is “surprising.� 

“Stocks are rallying because a September cut is a lock; however, if I take the data at face value, it implies that tariffs are not being passed onto consumers, which means firms are tolerating a profits margin squeeze for the time being,� he said.

At TradeStation, David Russell says that while Wall Street is breathing a sigh of relief, anxiety will likely continue as tariffs work their way through supply chains.

“Tread carefully here,� said Callie Cox at Ritholtz Wealth Management. “Long-term investors often benefit from buying the dip, but that doesn’t mean the road will be smooth. We’ve maintained that it’s a good time to know what you own, and to pare gains in runaway sectors exposed to tariffs.�

“This could be the calm before the storm,� said Greg McBride at Bankrate. “A slew of tariffs are taking effect this month. It may take a few months before those costs make their way fully to the consumer, but inflation is poised to pick up further in the remainder of 2025.�

There is some sign of tariff pass through to consumer prices but, at this stage, it is not significant enough to ring alarm bells, according to Seema Shah at Principal Asset Management. 

“Markets like today’s inflation print as it means the Fed can lower rates unheeded next month, she said. “Rate-cut decisions in October, December and beyond may well be more complicated.�

With CPI out of the way, the focus will shift to Friday’s retail sales figure, where we’ll see if consumers appear as upbeat as corporate earnings commentary has made them seem and amid worries about the labour market, according to Bret Kenwell at eToro.

In other economic news, US tariff revenue reached a fresh monthly record in July, though the increase wasn’t enough to prevent a widening in the monthly budget deficit — pointing to the federal government’s continuing fiscal challenges.

Corporate Highlights:

• Cava Group Inc. trimmed its annual sales outlook after a sharp deceleration in the second quarter as skittish diners spent less on restaurant meals, showing the pressure the brand is facing to keep up with its speedy growth in recent years.
• AI startup Perplexity made a formal offer to acquire Google’s Chrome browser for $34.5 billion, an audacious bid to get ahead of a potential requirement for the search giant to sell the web browser in US antitrust proceedings.
• President Donald Trump said members of his Cabinet would continue discussions with Lip-Bu Tan in the coming days after meeting with the Intel Corp. chief executive officer on Monday.
• Elon Musk lashed out against Apple Inc.’s app store practices, accusing the iPhone maker of favouring OpenAI.
• Just two months after one of the splashiest public debuts in years, stablecoin issuer Circle internet Group Inc. said revenue rose more than expected, sending its shares soaring.
• Gildan Activewear Inc. is in advanced talks to buy US underwear maker Hanesbrands Inc., people familiar with the matter said, in what would be its largest ever acquisition.
• The combination of Padcev, a bladder cancer drug from Pfizer Inc. and Astellas Pharma Inc., and Merck & Co.’s blockbuster immunotherapy Keytruda extended the lives of patients with a hard-to-treat form of the disease.
• If Novo Nordisk A/S’s wildly popular weight-loss drug succeeds in a highly anticipated trial for Alzheimer’s disease, Biogen Inc.’s Chief Executive Officer Chris Viehbacher doesn’t see it as a roadblock for his company’s medication. Rather, he sees it as an opportunity to potentially combine drugs and create a more potent therapy.
• Insmed Inc. rose after US regulators approved its drug Brinsupri as the first treatment for a debilitating lung condition, ending two centuries of waiting and paving the way for a potential new blockbuster.
• Smithfield Foods Inc., the largest pork supplier in the US, raised its full-year profit expectations as a rebound in its hog business counterbalances the impact of tariffs.
• Cargill Inc. revenue declined to the lowest in four years as the largest private company in the US continues to restructure in the face of declining crop prices and a shrinking American cattle herd.
• Opendoor Technologies Inc. has resumed its surge after cryptocurrency investor and influential newsletter writer and podcaster Anthony Pompliano said he’d bought shares in the digital real estate firm.
• China Evergrande Group said its Hong Kong stock will be delisted, marking the end of an era for the former high-flying developer whose demise came to symbolize the country’s property bust.

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.1% as of 4 p.m. New York time
• The Nasdaq 100 rose 1.3%
• The Dow Jones industrial average rose 1.1%
• The MSCI World Index rose 1.1%
• Bloomberg Magnificent 7 Total Return Index rose 1.2%
• The Russell 2000 Index rose 3%

Currencies

• The Bloomberg Dollar Spot Index fell 0.4%
• The euro rose 0.5% to $1.1675
• The British pound rose 0.5% to $1.3495
• The Japanese yen rose 0.3% to 147.76 per dollar

Cryptocurrencies

• Bitcoin rose 0.7% to $119,673.86
• Ether rose 6.4% to $4,519.45

Bonds

• The yield on 10-year Treasuries was little changed at 4.29%
• Germany’s 10-year yield advanced five basis points to 2.74%
• Britain’s 10-year yield advanced six basis points to 4.63%
• The yield on 2-year Treasuries declined four basis points to 3.73%
• The yield on 30-year Treasuries advanced three basis points to 4.88%

Commodities

• West Texas Intermediate crude fell 1.2% to $63.18 a barrel
• Spot gold rose 0.2% to $3,347.79 an ounce