US faces economic risks from elevated inflation and rising bond yields

July’s Consumer Price Index came in at 3.4% year-over-year, a marginal improvement from June’s 3.5% reading. Core CPI, which strips out food and energy, registered 2.5% annually, its lowest level in five months.

The oil problem that won’t go away

The energy index dropped 1.5% month-over-month in July, providing temporary relief at the pump. But on an annual basis, energy costs are still elevated, and geopolitical tensions continue to threaten supply stability.

Real wages, adjusted for inflation, have shown minimal to no growth. Workers are nominally earning more but buying less.

Bond yields are flashing warnings

The benchmark 10-year Treasury yield has climbed to the 4.70% to 4.72% range in early August. The 30-year yield has pushed past 5%.

To put that in context, 10-year yields were hovering around 3.5% as recently as late 2024. The climb of more than 100 basis points represents a significant tightening of financial conditions, even without the Fed touching its policy rate.

Analysts point to several forces keeping yields elevated: persistent inflation, the federal government’s expanding fiscal deficits requiring more Treasury issuance, and geopolitical risks tied to oil supply. The consensus view among market watchers is that yields could remain entrenched in the 4% to 4.5% range for the foreseeable future.

The Fed’s narrowing options

June’s core PCE inflation reading came in at 3.3% year-over-year, well above the 2% target that would typically justify rate cuts. Headline inflation moderated somewhat amid energy price fluctuations.

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