US CPI in July 2025: Inflation Holds, Core Inflation Rises—FX Implications for UK Businesses
US inflation in July 2025 matched expectations at 2.7% YoY, but core inflation rose to 3.1%, driven by services. We explain what this means for currency markets, Fed policy, and how UK businesses can adapt their FX strategy.
1. What happened
In July 2025, US headline inflation (CPI) held steady at 2.7% year-on-year (YoY), marginally below expectations of 2.8% ¹. Month-on-month, prices rose by 0.2%, matching consensus forecasts ¹.
However, core CPI—which excludes food and energy—rose by 0.3% MoM and stood at 3.1% YoY, slightly above projections and the strongest reading since early 2025 ²³. Notably, this rise was driven largely by increasing services costs, including shelter, medical care, airline fares, and household goods ³.
Goods inflation remains moderate for now, helping temper broader inflation concerns ².
2. How markets reacted
- Equity markets responded positively. The S&P 500 and Nasdaq both hit record highs, buoyed by hopes of interest-rate cuts ²²⁴.
- Rate-cut expectations surged. The probability of a September Fed cut soared—estimates now show a ~90–94% chance, up from ~60-80% before the data ²⁴.
- Bond yields shifted lower, as markets priced a more accommodative Fed stance ², while the US dollar softened modestly amid eased rate-cut uncertainty.
3. What this means for UK importers and exporters
CFOs and finance managers should consider multiple FX dynamics:
a) Currency impact via USD movements
Easing relative to the dollar can affect GBP/USD levels—potentially beneficial for businesses invoiced in dollars, and challenging for those paying in dollars. The current environment calls for:
- Tactical FX management, especially around key data releases.
- Leveraging prior hedging strategies to manage margin exposure to rate-sensitive costs.
b) Margin sensitivity to inflation-led cost pressures
Rising US services inflation, including transport and medical costs, may filter through to suppliers and logistics providers. This can increase input costs, especially in sectors like electronics, agriculture, or manufacturing.
c) Longer-term FX strategy considerations
Persistent core inflation increases tail risks. As tariff costs gradually pass through, FX volatility may rise. Businesses should:
- Reassess forward cover and expiry profiles.
- Explore natural hedging by aligning USDReceipts and USDPayments to reduce net exposure, especially if a Fed cut drives significant FX shifts.
- Monitor inflation signals closely to decide when to renew hedges or adjust coverage.
4. Strategy checklist for FX decision-makers
Finance teams should start by mapping all USD exposures to understand how currency moves could affect working capital. Forward contracts can be used selectively to secure certainty over future exchange rates, though it’s important to remember they are binding derivatives and may require collateral if rates move against you. Exploring natural hedging, such as matching USD receipts with USD payments, can also reduce net exposure without relying solely on financial instruments. Staying alert to upcoming Federal Reserve decisions will help anticipate market shifts, while regular margin stress-testing can quantify the impact of 1–3% FX movements on profitability. Above all, maintain an agile FX plan so you can adjust quickly as inflation trends and policy signals evolve.
5. Summary
July’s US CPI held headline inflation at 2.7% YoY, while core inflation rose to 3.1%, driven by services. Markets interpreted this as a signal that inflation is easing—but not too fast—and locked in a strong probability of a Fed rate cut in September.
For UK import/export firms, that means watching for dollar moves, managing margin sensitivity to inflation, and ensuring FX risk tools like forward contracts and currency netting are used wisely and compliantly.
Sources:
- Reuters – US inflation rises in July, in line with expectations ²⁰ :news41
- Business Insider – US inflation supports rate cut hopes ² :news42
- FT – Tariffs pushing up core US inflation ⁴ :search4
- The Times – Core inflation driven by services and tariffs: news34
- AP News – US stocks rally as inflation holds steady: news40
- Reuters – Indian rupee to rise amid Fed cut hopes: news33
