Are Rate-Increase Expectations Receding? Three Key Readings This Week

At 20:30 tonight, the week's final and most important piece of the puzzle arrived: U.S. July retail sales.

• Headline sales fell 0.6% month on month, against expectations of a 0.1% rise and a previous increase of 0.2%. It was the largest monthly decline since May 2025.

• Core sales, excluding autos, fell 0.3% month on month, against expectations of a 0.2% increase.

• The interpretation: clear weakness → cooling consumption → stronger expectations of rate cuts this year.

Why does this number matter most? CPI and PPI measure prices and costs. Retail sales show whether households are actually spending their money. Inflation is easing, but the resilience of consumption determines how much the economy cools and how quickly rates can fall.

With all three pieces in place, the picture is clearer:

Piece one: CPI, consumer inflation—released

Headline inflation was 3.4% year on year, compared with 3.5% previously, and 0.1% month on month.

Core inflation was 2.5% year on year, compared with 2.6% previously, and 0.2% month on month.

Energy pulled inflation down: petrol prices fell 2.9% month on month. Housing inflation, however, remains extremely sticky. This is the Federal Reserve's largest concern about cutting rates too readily. The downward trend is established, but inflation remains far from 2% and does not support aggressive cuts.

Piece two: PPI, business costs—released

Headline inflation was 4.7% year on year, against a previous 5.5% and an expected 4.9%, its lowest since March.

Headline inflation was 0.0% month on month, against expectations of 0.2%; core inflation was 0.2% month on month, against expectations of 0.3%.

PPI is a leading indicator for CPI. Upstream cooling and slower downstream price increases are releasing cost pressures and creating room for rate cuts.

Piece three: retail sales, economic resilience—released

Strong consumption → an economy that is not cooling → the Federal Reserve stays on hold.

Weak consumption → a cooling economy → stronger rate-cut expectations.

Tonight's 0.6% decline was clear weakness and falls into the latter category.

The market's central expectation

The probability of no change in September has risen to approximately 70%: 45% a week ago → 58% after CPI → 70% tonight. Expectations of a rate increase are receding.

The breakeven inflation rate, or BEI, remains stable at 2.29%. There is no panic over long-term inflation, and one month cannot change the broader trend.

In one sentence

Costs are cooling, inflation is easing slowly, consumption is weakening, and long-term expectations are stable. The market is moving out of a high-pressure tightening cycle into a transition of easing inflation, no rush to cut rates, and waiting for confirmation. Do not let one month's data set the narrative.