U.S. consumer prices barely increased in July as the cost of gasoline declined for a second straight month, while underlying inflation was benign, further reducing the odds of an interest rate hike from the Federal Reserve next month.
The small rebound in the monthly Consumer Price Index reported by the Labor Department on Wednesday, which was in line with economists’ expectations, also reflected marginal gains in the prices of food and apparel as well as decreases in the costs of hotels and motel rooms, and prescription medication. The report followed on the heels of news last week of surprise job losses in July. Still, economists said a rate increase this year remained on the table as inflation was running well above the U.S. central bank’s 2 per cent target.
“In-line inflation will keep the ’no need to hike rates’ narrative that took hold after last week’s jobs report intact,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “There will be another round of inflation data before the September meeting, so the story line could still change.”
Oil hits new one-week high as supply disruptions outweigh Strait of Hormuz talks
The Consumer Price Index edged up 0.1 per cent last month after dropping 0.4 per cent in June, which was the first decline in six years, the Labor Department’s Bureau of Labor Statistics said.
A 0.1 per cent rise in the cost of shelter accounted for roughly two-thirds of the gain in the CPI. Shelter was restrained by a 3.3 per cent plunge in prices for hotel and motel rooms, likely linked to the end of the FIFA World Cup tournament. That offset a 0.3 per cent increase in owners’ equivalent rent. Gasoline prices fell 2.9 per cent after decreasing 9.7 per cent in June.
In the 12 months through July, the CPI advanced 3.4 per cent after rising 3.5 per cent in June. July’s cooler inflation readings likely offer little comfort to consumers as prices are still higher than they were a year ago and wages are not keeping up. The high cost of living has soured many Americans’ views of U.S. President Donald Trump, and could weigh on the Republican party’s chances in the November midterm elections that will determine control of the U.S. Congress for the next two years. Trump won the 2024 presidential election in large part because of his promise to lower inflation.
Monthly core inflation also tame
Excluding the volatile food and energy components, the CPI gained 0.2 per cent last month after being unchanged in June. The so-called core CPI increased 2.5 per cent in the 12 months through July after climbing 2.6 per cent in June.
The Fed tracks the Personal Consumption Expenditures price indexes for its 2 per cent inflation target. Financial markets were pricing in about a 40 per cent chance of a rate increase at the Fed’s Sept. 15-16 policy meeting after the CPI data was released, slightly less than earlier in the day.
Policymakers will still get August’s CPI and employment reports before that meeting. Economists expect the pace of consumer price increases to pick up in August, reflecting the recent increase in oil prices. Job growth is also expected to rebound as seasonal distortions fade. The Fed last month left its benchmark overnight interest rate in the 3.50 per cent-3.75 per cent range. The dollar slipped against a basket of currencies in early trade on Wednesday. U.S. Treasury yields fell.
The United States’ position as a net oil exporter and the drawing down of petroleum inventories had cushioned the hit on the economy from the oil price shock sparked by the Middle East conflict, but some economists said that could not persist indefinitely. They also added that the U.S. and other nations would at some point need to replenish petroleum inventories, which would keep oil prices elevated. Trump accused Iran of being “devious negotiators” in an interview released late on Monday and described some of his current options in the war – “just bop along” and let Tehran fail economically or hit them “really, really hard.
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