A batch of inflation data this week did not provide justification for the Federal Reserve to adopt a more hawkish position on interest rates at its September meeting, analysts suggest. In a note to clients, the analysts highlighted that underlying U.S. consumer price growth is trending down and oil prices are likely to moderate from current levels. As a result, they argued, “there’s no new hawkish data to force the committee back toward the hawkish end of its dot plot or to disrupt the hold now consensus into September.” They further stated that rather than confirming a hawkish shift in June, the data supports a “non-hiking bias” for the final half of 2026. July’s consumer price index was described as “benign and largely uneventful,” they wrote.

In the year leading up to July, the headline Consumer Price Index decreased to 3.4%, down from 3.5% in June, aligning with expectations. Month-on-month, the inflation gauge rebounded as anticipated to 0.1%, following a previous decline of 0.4%. The index for energy, which has garnered attention amid a recent oil price spike attributed to the Iran war, experienced a monthly decline of 1.5%, despite a year-on-year increase of 14.7%. Petrol prices decreased by 2.9% month-on-month, marking a decline for the second consecutive month. A decline in drug prices was partially counterbalanced by significant increases in prices for video and audio equipment, which analysts at Capital Economics suggested might indicate cost pressures stemming from the swift advancement of artificial intelligence infrastructure.

Oil prices have fluctuated in recent weeks due to often conflicting developments in the Middle East, with expectations frequently oscillating regarding a lasting resolution to reopen the Strait of Hormuz, a crucial passage for global crude shipping that has been largely closed for months. Excluding the more volatile components such as energy and food, the “core” Consumer Price Index experienced a monthly increase of 0.2% and a year-on-year rise of 2.5%, aligning with market expectations. Concerns have proliferated that an energy shock could trigger a surge in inflation, which may subsequently compel the Federal Reserve to raise interest rates in reaction.

However, softer-than-anticipated labour market data for July has tempered expectations that Fed officials will increase borrowing costs at their forthcoming meeting in September. According to CME FedWatch, there is currently an approximate 71% likelihood that the Fed will maintain its current interest rates next month, alongside a 28% probability of an increase in rates. In theory, increasing interest rates can assist in controlling inflation, although this comes with the potential downside of impacting the labour market and overall economic performance.