US July inflation raises hope of another Fed pause

Washington — US consumer prices increased moderately in July as higher rents were mostly offset by declining costs of goods such as motor vehicles and furniture, a trend that could persuade the Federal Reserve to leave interest rates unchanged next month.

The report from the Labor Department on Thursday also showed underlying inflation pressures subsided last month. The annual increase in prices excluding the volatile food and energy components was the smallest in nearly two years.

Moderate inflation, together with a cooling labour market, bolstered economists’ conviction that the US central bank will be able to engineer a “soft landing” for the economy, after a year of hand-wringing about a recession.

“This was a very encouraging inflation report, it certainly cements expectations for the Fed to leave rates unchanged at the September meeting,” said Will Compernolle, a macro strategist at FHN Financial in New York.

The consumer price index rose 0.2% last month, matching the gain in June. Shelter accounted for more than 90% of the increase in the CPI, with rental costs increasing 0.4%.

Food prices gained 0.2%. Grocery food prices increased 0.3% after being unchanged in June. They were boosted by higher prices for eggs, beef, dairy as well as fruit and vegetables.

The cost of energy products edged up 0.1%, with fuel prices rising slightly. An increase in prices at the pump late in the month is likely to be reflected in the August inflation report.

The CPI advanced 3.2% in the 12 months through July. That followed a 3.0% rise in June, which was the smallest year-on-year gain since March 2021.

The increase in the annual CPI rate picked up for the first time in 13 months as it was calculated from a lower base after prices subsided last July after a jump that had boosted inflation to a pace not seen in more than 40 years.

Annual consumer prices have come down from a peak of 9.1% in June 2022. The Fed has a 2% inflation target.

Economists polled by Reuters had forecast the CPI would rise 0.2% last month and by 3.3% on a year-on-year basis.

The CPI report is one of two before the Fed’s September 19-20 policy meeting. Financial markets overwhelmingly expect the central bank to leave its policy rate unchanged at that meeting, according to CME Group's FedWatch tool. Since March 2022, the Fed has raised its benchmark overnight interest rate by 525 basis points (bps) to the current 5.25%-5.50% range.

US stocks opened higher while the dollar fell against a basket of currencies. US Treasury prices rose.

Rentals 

Excluding food and energy, the CPI gained 0.2% in July, matching the rise in June. In the 12 months through July, the core CPI increased 4.7%. That was the smallest year-on-year advance since October 2021 and followed a 4.8% rise in June. Underlying inflation was curbed by a 0.3% drop in core goods prices, which followed a 0.1% dip in June.

Goods deflation was driven by used cars and trucks, whose prices dropped 1.3%. There were also decreases in the prices of new cars and household furnishings.

But services inflation remained sticky, rising 0.3% for a third straight month. Services were lifted by higher rental costs. Owners’ equivalent rent (OER), a measure of the amount homeowners would pay to rent or would earn from renting their property, rose 0.5% after climbing 0.4% in June.

There were also increases in the costs of motor vehicle insurance, education and recreation. But airline fares declined 8.1%, falling for the fourth consecutive month. Hotel and motel rooms were cheaper in July. 

The inflation outlook was further brightened by a separate report from the labour department on Thursday showing initial claims for state unemployment benefits increased 21,000 to a seasonally adjusted 248,000 for the week ended August 5. Economists had forecast 230,000 claims for the latest week.

The larger-than-expected rise in filings followed on the heels of news last week that the economy added 187,000 jobs in July, the second-smallest count since December 2020. Still, labour market conditions remain tight, with the unemployment rate at more than 50-year lows, keeping wage gains elevated.

But with worker productivity rising, economists are optimistic that labour costs will be contained.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, fell 8,000 to 1.684-million during the week ending July 29, the claims report showed.

These continuing claims are low by historical standards, indicating that some laid-off workers are experiencing short spells of unemployment.

Reuters