July Inflation Blows a Hole In the Fed-Must-Remain-Tight Story
By Peter Navarro | RealClearMarkets | August 13, 2026
For months, the economic commentariat has been waiting for President Trump’s tariffs to ignite a new inflation fire. The script was already written: tariffs would raise consumer prices, the Federal Reserve would have to stay tighter for longer, and the American worker would once again pay the bill.
July’s inflation report just blew a hole through that story.
The Consumer Price Index rose only 0.1 percent in July. Core inflation, stripping out food and energy, rose just 0.2 percent. More important, core inflation over the last three months is running at only a 1.6 percent annualized rate.
That is not tariff inflation. That is price-stability territory.
The 3.4 percent headline inflation number will get the headlines, but it badly obscures what is happening underneath. The main distortion is energy. Energy prices are still 14.7 percent higher than a year ago, with gasoline up 24.6 percent, largely reflecting the oil shock associated with the conflict in Iran.
Yet even that pressure is now moving in the right direction. Energy prices fell 1.5 percent in July, and gasoline fell 2.9 percent. The three-month annualized headline CPI is just 0.5 percent.
This is precisely why the Federal Reserve should not make the classic central-bank mistake of treating an oil shock as if it were a generalized inflation spiral. You do not cure a geopolitical oil shock by crushing American factories, homebuilders, farmers, and small businesses with unnecessarily high interest rates. Higher rates will not pump one extra barrel of oil.
Look instead at the parts of the economy where tariff inflation was supposed to show up first.
Core goods prices are up only 0.8 percent from a year ago. New vehicle prices are up just 0.5 percent. Used cars and trucks are down 1.9 percent. Rental cars are down 3.9 percent. Prescription drug prices fell 0.8 percent in July and are down 3.1 percent over the year. Medical equipment and supplies are down 2.7 percent.
Across the CPI basket, prices are falling year over year for everything from used cars and prescription drugs to appliances, wireless services, health insurance, and smartphones.