Underlying consumer prices climbed at a restrained pace in the United States last month, modestly weakening the case for a rate hike at the Federal Reserve’s September meeting, and putting slight downward pressure on the dollar. According to data published by the Bureau of Labor Statistics this morning, the core consumer price index—with highly-volatile food and energy prices excluded—rose 0.2% in July from the prior month, accelerating from a flat print in the prior month, but climbed by a fairly-comfortable 2.5% over the same period last year. The more-volatile all-items headline price measure edged 0.1% higher in July from the prior month even as gasoline prices tumbled, rising 3.4% in year-over-year terms. This was broadly in line with consensus estimates among economists polled by the major data providers ahead of the release.

Treasury yields are edging up very slightly on the policy-sensitive front end of the curve—possibly reflecting markets positioned for an even weaker print—equity futures are pointing higher, and the dollar is retreating against its major rivals as market participants pull back on monetary tightening expectations. Cross-currency rate differentials, which have tilted against the greenback since Friday’s payrolls report, are narrowing further, giving the Canadian dollar, euro, British pound, and Japanese yen some room for further appreciation.

But the data comes against a complicated fundamental backdrop. Surveys suggest firms are still passing on tariff increases, long after they were first imposed last year. Energy prices are falling but remain high, with the Strait of Hormuz effectively blocked and global inventories dwindling. And the build-out of artificial intelligence is pushing up the prices of the raw materials and electronics that go into data-centre infrastructure. At the same time the American labour market appears to be cooling—Friday’s figures showed 23,000 jobs lost in July, with the prior two months revised down by a further 103,000—which suggests consumer demand could soften.

Traders, meanwhile, are struggling to read the Fed’s reaction function. The rate-setting committee is visibly split, and Kevin Warsh, newly installed as its chairman, has sent mixed signals: casting doubt on how policymakers will measure inflation in the future, wavering on whether interest-rate changes will remain the main tool of monetary policy, and hinting that markets themselves might do the bank’s work for it.

Much could change in the coming weeks. The central bank’s preferred inflation measure, the core personal consumption expenditures index, will be updated later this month; and with the August payrolls and inflation reports both due before the September meeting, market narratives could yet shift materially. Market participants should brace for increasing turbulence as the summer winds down.