Is a U.S. inflation shock still ahead?

July’s U.S. inflation report surprised on the soft side and lit a fire under risk assets, yet the debate over tariff pass-through is far from over. The Bureau of Labor Statistics said headline CPI rose 0.2% month on month and 2.7% year on year in July, while core CPI advanced 3.1% from a year earlier, its quickest pace since February. The figures confirm that, for now, inflation is edging lower at the headline level even as core services remain sticky.

U.S. equities took the data as a green light. The S&P 500 and Nasdaq closed at fresh records on Tuesday, with gains of 1.13% and 1.39% respectively, as investors inferred more room for the Federal Reserve to ease. Reuters put the closing levels at 6,445.76 for the S&P 500 and 21,681.90 for the Nasdaq, while the Dow added 1.1%.

SPDR S&P 500 ETF Trust (SPY)$642.69+$6.84(+1.08%)Today$642.87+$0.18(+0.03%)After Hours1D5D1M6MYTD1Y5YmaxOpen638.23Volume64.8MDay Low635.14Day High643.08Year Low481.80Year High642.85

Rate-cut odds jumped as well. The CME FedWatch tool now shows markets heavily favoring a September cut and, after Tuesday’s print and recent labor softness, increasingly entertain the prospect of additional moves before year-end. Several desks frame the most likely path as a quarter-point reduction in September with scope for more in October and December; Goldman Sachs explicitly forecasts three 25-basis-point cuts across those meetings.

If tariffs imposed in the spring were going to rip through consumer prices immediately, this CPI would have been the place to see it. Instead, the pass-through looks gradual and uneven. Goldman’s economists have argued that tariffs should nudge monthly core prints higher in coming months but not derail disinflation entirely, and their baseline still pairs that view with a three-cut Fed path. Markets, in other words, are betting that growth can be protected while keeping the inflation anchor in sight.

Politics still intruded on the macro backdrop. President Donald Trump escalated his very public pressure campaign on Fed Chair Jerome Powell, saying he is weighing a “major lawsuit” tied to cost overruns at the central bank’s headquarters renovation. The White House confirmed the consideration on Tuesday, even as legal analysts questioned the practicality and relevance to monetary policy. Whatever the legal merits, the episode underscores the unusual political noise surrounding the Fed into autumn.

Elsewhere, tech headlines had their own plot twist. AI startup Perplexity lobbed an unsolicited $34.5 billion offer to buy Google’s Chrome browser. No one expects Google to part with its crown-jewel distribution channel, and antitrust remedies remain speculative, but the gambit spotlights how aggressively AI insurgents are trying to seize attention and distribution ahead of a new browser-plus-assistant era.

Across the Atlantic, European risk sentiment followed Wall Street’s lead. The pan-regional Stoxx Europe 600 edged up about two-tenths of a percent on Tuesday as relief over the U.S. inflation print and a 90-day extension of the U.S.-China tariff truce steadied nerves into the European close. Gains were broad but modest, reflecting the same tension investors see in the U.S. data: a gentle glide in headline inflation, offset by persistent core pressures and policy uncertainty.

Corporate strategy in Europe is adapting to that uncertainty too. Rather than swing for transformational megadeals that risk long regulatory timelines or political interference, more management teams are pursuing smaller, faster-to-integrate transactions that add technology, talent, or market share without balance-sheet strain. Airlines were early to this shift, preferring minority stakes and “bite size” tie-ups to full mergers, and the logic is spreading across sectors as boards seek growth with tighter execution risk.

July CPI keeps the soft-landing narrative alive at the headline level, even as the core pulse reminds the Fed to step carefully. Markets are leaning into a three-cut year, the White House-Fed saga adds an unusual layer of political risk, AI insurgents are rewriting the distribution playbook, and European corporates are choosing precision M&A over high-stakes bets. None of these threads guarantees a Disney-style ending, but the data to date do not read like a jump-scare either. The next reveals will come from August inflation, tariff pass-through in core services, and whether the Fed validates what the market already believes.