Inflation data for July delivered a split message for markets — headline price growth cooled, but underlying inflation came in hotter than expected, suggesting President Donald Trump's tariff wave has yet to create a broad price shock in the economy.

The Consumer Price Index rose 2.7% year-over-year in July, unchanged from June and falling short of economists’ forecasts of 2.8%, while the monthly rate decelerated from 0.3% to 0.2%, in line with expectations.

Core inflation — which strips out volatile food and energy prices — delivered the upside surprise. The annual core rate climbed from 2.9% to 3.1%, the highest since February and overshooting expectations for 3%. Core CPI rose 0.3% on the month, up from June's 0.2% gain.

Price increases were led by medical care, airline fares, recreation, household furnishings and operations, and used cars and trucks. Declines were seen in lodging away from home and communication.

Economists had warned that tariffs on a wide range of imported goods — from household furnishings to recreational equipment — would filter through to consumer prices in the second half of the year.

Despite the hotter core print, traders held firm to their rate-cut expectations. Futures pricing from CME data shows a 90% chance of a 25-basis-point cut in September, a 61% probability of another cut in October, and near-full pricing for a second cut by December.

Nasdaq 100 futures rose 0.8% after the data, S&P 500 futures gained 0.6%, and the small-cap Russell 2000 jumped 1.5%.

U.S. short-term bond yields dipped as investors stuck to the view that the Fed will ease policy this fall.

On Monday, the S&P 500 as tracked by the Vanguard S&P 500 ETF VOO closed 0.2% lower.

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Image created using artificial intelligence via Midjourney.