July CPI Lands in JPMorgan Base Case as Core Inflation Hits 0.2%

JPMorgan's most likely July CPI scenario came true

JPMorgan's trading desk published a five-scenario playbook for July's consumer price index two days before the release. The report landed close to the middle of it, and the market moved only a little. The broader lesson came afterward. A tame inflation number did not mean the economy was healthy. Over the next two weeks the consumer spending data weakened, and wage growth stayed behind price growth.

The desk tied S&P 500 moves to the month-over-month change in core CPI, which excludes food and energy. It gave a 40% chance to the most likely bucket, a core rise of 0.20% to 0.25%, and expected the index to gain 0.25% to 0.75% in that case2. It gave 25% odds to a hotter 0.25% to 0.30% reading, which it said could push the index down 0.5% to 1.25%. A reading above 0.3% carried 5% odds and a possible drop of 1.5% to 2.5%2. On the cooler side, a core gain of 0.15% to 0.20% (25% odds) could lift stocks 0.5% to 1%. A reading below 0.15% (5% odds) could produce a rally of 1% to 2%2.

Economists polled by Dow Jones expected headline CPI to rise 0.1% in July, taking the annual rate to 3.4%. They expected core to rise 0.2% on the month and 2.5% on the year2. JPMorgan economist Michael Feroli's forecast was a little more precise: 0.12% headline and 0.22% core4.

What the Bureau of Labor Statistics reported

The Bureau of Labor Statistics (BLS) released the July CPI on Aug. 12. Seasonally adjusted prices rose 0.1%, after a 0.4% drop in June. The 12-month rate fell to 3.4% from 3.5%11. Core prices rose 0.2% on the month after no change in June, and the core annual rate eased to 2.5% from 2.6%11. Every headline number matched consensus1418.

The details were less calm than the totals:

• Energy: prices fell 1.5% in July but were still up 14.7% from a year earlier. Gasoline was up 24.6% over the same period11.
• Shelter: the index rose only 0.1%, yet still made up about two-thirds of the monthly increase in headline CPI11. That small rise owed a lot to a 2.8% drop in hotel and other lodging prices. Owners' equivalent rent, which estimates what homeowners could charge in rent, rose 0.3%14.
• Other services: airline fares rose 2.2% and medical care 0.4%14.
• Core goods: goods outside food and energy rose 0.2% after falling in each of the two prior months11. Feroli had expected goods prices to firm again, citing tariff costs still passing through and rising prices for tech products4.

The S&P 500's move fit the forecast

CNBC reported that the S&P 500 rose 0.26% to 7,748.50 on release day. The Nasdaq Composite gained 0.54%, and the Dow was roughly flat21. Yahoo Finance and Investopedia reported similar moves of about 0.3%2225. One trading-education site reported a much bigger gain and a record close for that session24. That account does not match the mainstream closing figures, and CNBC's figures are more reliable. The record came a day later. The S&P 500 closed at 7,798.99 on Aug. 13, after July producer prices came in flat against expectations of a 0.2% rise26.

The 0.26% gain sits at the very bottom of the range JPMorgan attached to its base case. That makes the call accurate but not very informative. Most of the day's gains came from the technology sector. CoreWeave and Super Micro Computer jumped after earnings, while only three of the 11 S&P 500 sectors were up at one point in the session25. Inflation relief explains why stocks did not fall. It does not explain why they rose.

One analysis of the JPMorgan grid argued that the market had already priced in cooling inflation. It noted that a benign print would be worth far less to stocks than a similar print in June3. The same analysis calculated that the grid's probability-weighted expected move was only about +14 basis points, close to zero3. It also pointed out that the line between a positive and a negative expected day sat at 0.25% core. That threshold is hidden by rounding, because the BLS publishes core CPI to one decimal place3. The modest reaction supports that view: by the morning of the release, investors had already priced in the cooling.

How the report changed Federal Reserve rate expectations

The report mattered because of the Federal Reserve. Before the release, fed funds futures implied a roughly 52% chance of a rate hike in September, according to CME's FedWatch tool2. The Fed had held its policy rate at 3.50% to 3.75% on July 29, with three officials voting for an immediate quarter-point increase3. JPMorgan's desk said the U.S. had so far avoided an inflation spike from the Middle East conflict. It said markets now wanted to know whether core inflation would stay sticky or another period of disinflation was possible2.

Most coverage concluded that the in-line report took a September hike off the table1722. Rob Williams, chief investment strategist at Sage Advisory, said the CPI and payroll data together ruled out September. He said markets were looking toward December instead, when futures implied a 73% chance of a hike21.

Not everyone agreed. Kiplinger noted that headline inflation of 3.4% and energy prices nearly 15% higher than a year earlier made it unlikely the Fed would declare victory12. Ryan Weldon of IFM Investors expected the Fed to look past swings in headline inflation and point to easing core services prices as its reason to hold16.

My reading is that the report delayed a hike rather than ruling one out. The pressure to raise rates comes mainly from oil and headline inflation, and a mild core number does little to ease either. That argument was made before the release as well3.

Consumer spending weakened after the CPI release

The weaker side of the story came in the days and weeks after the release.

Wages are lagging prices. Average hourly earnings rose 3.2% over the year, below the 3.4% inflation rate. That makes four straight months in which inflation has outpaced wage growth1516. Wage growth was the slowest since 202116. Heather Long of Navy Federal Credit Union called this the central issue for middle- and lower-income households15.

Retail sales fell. Sales dropped 0.6% in July, the steepest decline since May 2025, against forecasts of a small gain. In the same week, the University of Michigan's preliminary consumer sentiment index fell about 8%, to 5133. After adjusting for the CPI, real retail sales fell 0.7%35. The "control group," a narrower measure that feeds into the GDP calculation, fell 0.4%3536.

Coverage split on how much the drop meant. The Conference Board argued that one-off factors exaggerated the weakness. Amazon moved its Prime Day sale into June, and gasoline prices fell36. KPMG called the drop a correction after a second quarter boosted by large tax refunds. It stressed that sales were still up about 5% from a year earlier35. Other economists were more worried. Oliver Allen of Pantheon Macroeconomics said the data pointed to a sharper slowdown ahead38. Bill Adams of Fifth Third said that even after the special factors, July was a weak month for spending37.

I side with the more worried camp. Later data showed spending fading rather than collapsing. In the Commerce Department's later income and spending report, inflation-adjusted consumer spending was flat in July after a 0.4% gain in June. The Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, held at 3.7% year over year39. July retail sales were later revised to a 0.5% decline, and August sales rose 1.2%40. Families are not cutting back sharply. KPMG and EY-Parthenon both describe higher-income households carrying spending while lower- and middle-income households trade down and shop more selectively3135.

Weak spending also weakens the case for a hike

Soft demand cuts both ways for stocks. Ellen Zentner of Morgan Stanley Wealth Management said markets might welcome weak spending data in the short run because it argues against raising rates33. That helps explain how the S&P 500 reached records that week despite the retail drop.

It also leaves stocks dependent on each new inflation report. The other side of JPMorgan's grid showed up two months later. On Oct. 14, a hot September CPI, driven by a jump in gasoline prices, pushed the S&P 500 down 1.1% and the Nasdaq down 1.9%28. The odds of an October hike rose to about 46% from about 22%29.

The July report gave investors one calm month, not a turning point. JPMorgan's scenario grid correctly predicted the size of the market's move. The bigger picture is that core inflation is holding steady while oil prices, real wages and consumer spending strain household budgets, and stocks remain exposed to every inflation release that tests whether the Fed will hike.