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Rate cut bets rise after mild July inflation

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Treasury official says tariffs are being paid by exporters

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Some economists expect gradual tariff impact on consumers

By Davide Barbuscia

NEW YORK, Aug 12 (Reuters) - Investors are betting

harder on a September Federal Reserve interest rate cut after

last month's mild inflation bump, which indicated the

pass-through from President Donald Trump's sweeping import

duties to goods prices has so far been limited.

July inflation numbers released on Tuesday came in largely

within expectations, strengthening traders' bets the Fed will

start cutting rates at its next policy meeting in September,

particularly after a weak employment report in July and sharp

downward revisions to job figures for May and June.

"I think that the market coming in was quietly expecting a

hotter number, and it didn't," said Andrew Szczurowski, co-head

of the mortgage and securitized investment team at Morgan

Stanley Investment Management.

"When you factor in the other side of their (the Fed's)

mandate, then all of a sudden it looks like they're missing

their labor target more than they're missing their inflation

target," he said.

Rates futures traders increased bets on a 25 basis point

interest rate cut in September after the data release, with the

probability of a September cut rising to 98% against about 89%

earlier on Tuesday, according to LSEG data.

Two-year Treasury yields, which tend to reflect expectations

of changes in monetary policy, declined after the data and were

last at 3.729%, about two basis points lower on the day.

The consumer price index rose 0.2% last month, in line with

expectations, and rose 2.7% year on year, below consensus

forecasts of 2.8%.

Trump used the subdued headline CPI to reinforce his claim

that tariffs do not hit consumers, taking aim at Goldman Sachs

economists for what he said were bad predictions on the tariff

impact.

Joseph Lavorgna, counselor to Treasury Secretary Scott

Bessent, said Tuesday's inflation figures indicated that

exporters were largely absorbing tariffs by cutting prices.

"Every month, we keep waiting for the inflation that doesn't

present itself, and then people say we need clarity. No, you've

had six months in a row where the numbers have disappointed to

the downside. Effectively, where you thought there would be

inflation, there isn't," he said.

Excluding the volatile food and energy components, the CPI

rose 0.3%, the biggest gain since January, after climbing 0.2%

in June. The so-called core CPI increased 3.1% year-on-year in

July after advancing 2.9% in June.

Tiffany Wilding, economist at bond manager PIMCO, said she

expected core CPI to tick higher to a peak of 3.4% by year-end

as tariff-related costs are passed on to consumers.

"It's going to take time for these tariffs to really show up

in earnest," said Tom Porcelli, chief U.S. economist at PGIM

Fixed Income. "Anyone waiting for this to show up in sort of one

big move higher in any given month, that's not how it's going to

be. It's going to sort of trickle in," he said.

The Fed will have further inputs from August inflation and

labor data before its next rate-setting meeting.

The data came after Trump on Monday nominated economist E.J.

Antoni as the new Bureau of Labor Statistics (BLS) commissioner,

10 days after firing the agency's previous leader following a

weak scorecard of the job market, accusing her without evidence

of manipulating the figures.

Antoni has been critical of the BLS, an agency that has come

under heightened scrutiny for the eroding quality of the data it

produces.