Inflation Eases in July as Retail Sales Post Sharpest Decline Since 2025

Matthew Rubin Chief Investment Officer

 

1. July’s Consumer Price Index rose modestly, meeting expectations, with a key underlying measure falling below the Federal Reserve’s 2% annual target for the first time since late 2025.
2. July retail sales fell short of forecasts, suggesting that elevated borrowing costs and cooling labor market conditions may be beginning to weigh more meaningfully on consumer activity.
3. Existing home sales fell 1.7% in July as rising mortgage rates kept buyers on the sidelines, even as tight inventories pushed the median home price to its second-highest level on record.

 

1. July Inflation Data Reflect Continued Progress

Headline and core inflation both matched consensus forecasts last month, while shelter costs held steady and a closely watched measure of underlying price pressure moved below the Federal Reserve’s long-standing goal.

Consumer prices rose 0.1% in July and were up 3.4% from a year earlier, in line with consensus expectations.¹˒² Core inflation, which excludes food and energy, climbed 0.2% for the month and 2.5% year over year, also matching forecasts.¹˒² Notably, the three-month annualized core CPI rate fell to 1.6% in July, the first reading below the Federal Reserve’s 2% annual target since December 2025.¹

Shelter costs, which account for more than one-third of the overall index, increased just 0.1% for the second consecutive month.¹ Recent moderation in home price growth suggests shelter inflation may ease further in the months ahead. Core goods prices, however, recorded their largest monthly gain since September 2025, driven partly by increases in used vehicle and consumer electronics prices.¹

Overall, the data suggest that elevated energy costs have not generated broad-based price pressures across core categories. Together with a contraction in July payrolls, the report may support a patient approach from the Federal Reserve ahead of its next policy meeting.³

2. Retail Sales Disappoint in July, Raising Questions About Consumer Momentum

Spending missed consensus expectations last month as broad-based weakness across nonstore retail, motor vehicles, and gasoline stations drove the first monthly decline since October 2025.

Retail sales fell 0.6% in July, sharply missing the consensus forecast of a 0.1% gain and reversing June’s 0.2% advance.⁴˒² The shortfall followed a 0.2% gain in June and marked the first monthly decline since October 2025 and the largest since May 2025, pointing to a meaningful softening in consumer momentum heading into the second half of the year.⁴

Spending at motor vehicle and parts dealers fell 1.8% from the prior month, while electronics and appliance stores posted a decline of 0.5%.⁴ Gasoline station sales fell 0.9% as well, contributing to the overall pullback.⁴ Because retail data are reported in nominal terms, energy price movements can distort comparisons with prior months.

Excluding gasoline, the underlying picture remained broadly soft, with weakness extending across most categories.⁴ Lower-income consumers have faced growing budget pressures throughout the year, and last month’s result may reflect some of that strain beginning to show up more broadly in spending data.⁴ The Federal Reserve is likely to weigh the report alongside other incoming data, including the July CPI release, as it evaluates its path on interest rates ahead of September.¹˒²

3. Rising Mortgage Rates Pull Existing Home Sales Lower in July

Existing home sales declined to a seasonally adjusted annual rate of 4.06 million last month while the national median home price rose, approaching a record high and extending a difficult stretch for the housing market.

Home sales pulled back in July as rising mortgage rates continued to weigh on buyer activity. Existing home sales fell 1.7% from June to a seasonally adjusted annual rate of 4.06 million, coming in below economists’ expectations of a 1% decline.⁵˒² The result extended a slide from June, when sales slipped 1.4%.⁵

Meanwhile, the national median existing-home price rose 2% from a year earlier to $434,100, the second-highest median on record, trailing only the $440,600 peak reached the prior month.⁵ Mortgage rates remained a meaningful constraint on sales activity. The 30-year fixed-rate mortgage averaged 6.69% last week, the fifth consecutive weekly increase after opening July at 6.43%.⁶

Available inventory declined as well. Unsold homes fell 1.9% from June to 1.54 million units, as many homeowners with lower fixed rates from prior years remained reluctant to list their properties.⁵ Despite the monthly decline, existing home sales edged up 0.7% from a year earlier, suggesting that underlying demand is providing some support for the market even as affordability remains stretched.⁵

Looking Ahead

1. FOMC Minutes– Wednesday, August 19^th
2. Initial Jobless Claim– Thursday, August 20^th
3. S&P Global Flash PMI – Friday, August 21^st

Why It Matters

Wednesday’s release of the minutes from the Federal Open Market Committee’s most recent policy meeting will be the most watched item of the week. Three committee members dissented in favor of a rate increase at that gathering,⁷ and investors will look to the minutes for greater detail on the reasoning behind those dissents and how the full committee weighed inflation risk versus economic growth. Thursday’s initial jobless claims data will provide the next weekly read on labor market conditions, carrying added significance following last month’s unexpected contraction in payrolls. The Federal Reserve monitors labor data closely in evaluating its policy path, and any further softening in claims could sharpen the debate heading into the September meeting. Friday’s S&P Global Flash PMI readings will offer one of the first broad views of economic activity in August, spanning both manufacturing and services sectors. Together, the three releases will help shape market expectations ahead of the Federal Reserve’s September policy decision.

For the period ending 8/14/26.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ U.S. Bureau of Labor Statistics, Consumer Price Index News Release, August 2026
² Bloomberg
³ U.S. Bureau of Labor Statistics, The Employment Situation, July 2026
⁴ U.S. Census Bureau, Advance Monthly Sales for Retail and Food Services Press Release, August 2026
⁵ INational Association of Realtors, Existing-Home Sales, August 2026
⁶ Freddie Mac, Primary Mortgage Market Survey, August 2026
⁷ Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement, July 29, 2026

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The Personal Consumption Expenditures (PCE) Price Index measures the change over time in prices paid by U.S. consumers for goods and services. Published monthly by the Bureau of Economic Analysis (BEA), it is the Federal Reserve’s preferred measure of inflation and is used to assess progress toward the Fed’s 2% inflation target. The PCE Price Index differs from the Consumer Price Index (CPI) in its scope, weighting methodology, and treatment of certain healthcare expenditures; it generally registers a slightly lower inflation rate than CPI.
The Core Personal Consumption Expenditures (PCE) Price Index measures inflation in consumer spending after excluding food and energy prices, which tend to be more volatile. Published monthly by the Bureau of Economic Analysis (BEA) alongside the headline PCE, Core PCE is closely monitored by the Federal Reserve as a signal of underlying, persistent inflation trends. Because it strips out short-term price fluctuations in commodities and fuel, it is considered a more stable indicator of the direction of inflation over time.
The PCE Price Index family includes both the headline Personal Consumption Expenditures Price Index and the Core PCE Price Index, published monthly by the Bureau of Economic Analysis (BEA). The headline index captures price changes across all goods and services consumed by U.S. households; the core variant excludes food and energy to isolate underlying inflation trends. Together, these measures serve as the Federal Reserve’s primary inflation benchmarks in evaluating monetary policy, including decisions regarding the federal funds rate target.
The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending. The CPI is a measure of inflation and deflation. The CPI report uses a different survey methodology, price samples, and index weights than the producer price index (PPI).
Additional Disclosures: International and Foreign Securities, Fixed Income Investments, the Consumer Price Index, the Producer Price Index
Comparative Index Descriptions: The Standard & Poor’s (S&P) 500 Index, The Russell 2000® Index, The NASDAQ Composite Index, The MSCI EAFE Index, Dow Jones Industrial Average® (Dow Jones or DJIA), The Bloomberg Barclays US Aggregate Bond Index (US Agg Bond), The CBOE Volatility Index (VIX).
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