July Inflation Data Sparks Alarm: ’The Risk That’s Knocking Harder Than Ever’

Economists are bracing for impact as July's inflation numbers loom—another gut-punch to markets already on life support.

Here's why Wall Street's sweating bullets:

• The Fed's favorite excuse—'transitory'—is gathering dust in the rearview mirror.

• Main Street's wallet is getting lighter while the money printer's ghost still haunts balance sheets.

• Crypto traders, meanwhile, are stacking SATs like doomsday preppers—because when fiat fails, orange coins and laser eyes inherit the earth.

Bottom line? The 'soft landing' narrative just took another nosedive. But hey—at least your banker's bonus is inflation-adjusted.

The Fed's dual mandate tension

Some economists argue the Fed should hold off on rate cuts — or even consider raising rates.

"These are broad-based inflationary pressures," Lauren Saidel-Baker, economist at ITR Economics, told Yahoo Finance following this week's hotter-than-expected PPI print. "I see more reason for rates to be rising in order to not let inflation get away from us."

Saidel-Baker noted these pressures have been building for years and aren't solely the result of tariffs. She pointed to higher wages and rising energy costs as key drivers now feeding into the data. She also stressed that the full impact of tariffs will take time to emerge.

"Inflation is the risk that's on our doorstep, much more so than the labor market," Saidel-Baker emphasized. "Fed officials know that."

Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments

Chicago Fed president Austan Goolsbee cautioned Wednesday that a continued rise in services prices, similar to what was seen in this week's CPI report, WOULD be worrisome

"Services are not tied to the tariffs," he said. "Everyone is hoping that's just a blip. There's noise in the data. If you start to get multiple months where the components suggest that the impact of tariff inflation is not staying in its lane, that would be more of a concern."

At the same time, the latest numbers painted a mixed picture.

Michael Gapen, chief US economist at Morgan Stanley, told Yahoo Finance earlier this week that the July CPI report offered "some good news and some bad news."

"The good news here is that tariff impulse into inflation wasn't as high as anticipated this month," he said. "The bad news is that services inflation was pretty soft in prior months. And it did give the impression to many that, hey, maybe we could ignore tariff inflation because services weakness will offset it. But now, I think a lot of that's reversed."

"I'm not ready to say, 'Oh, services is about ready to roar higher," he added, "[but] if it's firming, we do have to watch out."

Gapen is still calling for no rate cuts this year, despite the market's NEAR certainty that at least one is coming.

"There's enough inflation momentum here that suggests inflation will continue to deviate from the Fed's mandate," he said. "Immigration controls are likely to keep the unemployment rate low. And that means a tight labor market."

Read more: How jobs, inflation, and the Fed are all related

Despite the recent downward revisions, the labor market has remained relatively strong, supporting consumers as spending patterns hold up.

Still, cracks are emerging as payroll growth slows, job openings decline, and continuing claims, or the number of Americans receiving ongoing unemployment benefits, edge higher.

Chris Watling, global economist and chief market strategist at Longview Economics, argued that while inflation might firm up over the next few months, the bigger story is the risk of a slowing economy.

"The more important factor here is the employment and growth mandate [which] is why the market's focus is shifting,” he said. "The manufacturing sector has had no growth in three years. Housing is deteriorating. I think this is a really clear slowdown in this economy. And I'm amazed the Fed isn't getting on with it."

Watling said he believes the Fed should begin easing in September and continue cutting through the end of the year, arguing that the slowdown in underlying growth will outweigh any near-term uptick in inflation.

Allie Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at [email protected].