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

Wall Street spent most of July bracing for a rate hike. When the ceasefire between the U.S. and Iran collapsed and hostilities resumed near the Strait of Hormuz, crude oil spiked on every headline, and traders started pricing in a hawkish September from Fed Chair Kevin Warsh. The CME FedWatch tool showed a 55% probability of a hike heading into this week — a real threat for anyone holding rate-sensitive stocks or long-duration bonds. 

Then the data showed up. The Consumer Price Index, released Wednesday, and the Producer Price Index, released today, both came in cooler than the panic implied. That doesn’t mean the inflation fight is over. But it does mean the market’s rate-hike math just got a lot more complicated, and investors positioned for a hawkish Fed may need to rethink their assumptions.

The Numbers That Changed the Math

The Bureau of Labor Statistics reported Tuesday that headline CPI rose just 0.1% in July, pulling the annual rate down to 3.4% from June’s 3.5%. Today’s Producer Price Index for final demand was flat — unchanged month over month — with the annual rate cooling to 4.7% from 5.5% in June. 

Neither report screamed “hike” and traders noticed: CME FedWatch odds of a September increase fell from 55% before the CPI release to 42% after. It crashed to 32% this morning.

Granted, one data point doesn’t make a trend, and 3.4% is still well above the Fed’s 2% target. But the direction matters as much as the level, and July marked the second straight month the annual rate moved lower rather than higher.

Why Oil Didn’t Wreck the Report

Here’s the part that surprised a lot of investors watching oil headlines all month. Yes, crude spiked intermittently in late July as fighting resumed near key shipping lanes. But the average monthly price of crude actually fell — from roughly $80.38 a barrel in June to $79.32 in July. Averages smooth out spikes, and the BLS calculates its energy indexes on monthly averages, not daily peaks. That lag is why the gasoline index dropped about 2.9% in July, the second consecutive monthly decline in pump prices, even as the news cycle suggested otherwise.

Electricity told a different story. The average U.S. residential bill jumped from $177 in June to $217 in July, driven by peak summer cooling demand — even though per-kilowatt-hour rates held roughly flat near $0.19 to $0.21 nationally. Meanwhile, shelter and hotel costs softened, and grocery prices — meat and produce in particular — ticked lower, offsetting the electricity bump in the broader index.

Here’s the catch: retail gasoline began drifting higher again in late July and early August as the Strait of Hormuz tensions resumed. The average price of gas is $4.07 per gallon today compared to $3.87 a month ago. That’s a lagging indicator working against investors, not for them — August’s report could look meaningfully different.

Key Takeaway

Smart investors shouldn’t read this as an all-clear signal. Inflation is cooling, but it’s cooling from an elevated base, and the same energy market that gave July’s data a pass is already drifting the other way heading into August. 

The prudent move isn’t to bet heavily on a hold or a hike — it’s to recognize that Warsh’s Fed is now genuinely data-dependent, which means volatility around every CPI and PPI release between now and Sept. 18 is the realistic scenario. Investors holding long-duration bonds or rate-sensitive sectors should expect a bumpy few weeks, not a clean resolution.

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