U.S. July CPI rises 0.1% as September Fed hike odds fall to 42%
The U.S. Labor Department said Wednesday that the consumer price index rose 0.1% in July from the previous month, while the annual increase slowed to 3.4%, exactly matching market expectations. Core CPI, which excludes food and energy, rose 0.2% month over month and increased 2.5% from a year earlier, also in line with Wall Street consensus. The mild reading further reduced market expectations for a Federal Reserve rate hike in September. Energy prices fell another 1.5% from the previous month, after plunging 5.7% in June. But prices were still up 14.7% from a year earlier, reflecting the earlier impact of conflict in the Middle East. Food and shelter costs each rose 0.1%. Shelter's increase was modest but still accounted for about two-thirds of the overall CPI gain. Within shelter, lodging away from home fell sharply by 2.8%, putting significant downward pressure on the shelter index. Among other components, new-vehicle prices rose 0.1%, while prices for used cars and trucks increased 0.4%. Medical-care costs rose 0.4%, and airfares accelerated, rising 2.2%. After the data were released, stock-index futures rose and Treasury yields fell across the curve. According to the CME FedWatch tool, traders further lowered the probability of a September Fed rate hike to 42%. Allen Zentner, chief economic strategist for wealth management, said: "The in-line inflation data will continue to support the 'no need to hike' narrative that took shape after last week's employment report. There is still another inflation report before the September policy meeting, so the story could change. But unless the numbers deviate significantly, the Fed will most likely keep rates unchanged next month." The market had previously priced in a September hike at a high probability, but an unexpected net loss of jobs in July, combined with volatility in energy prices, has significantly reduced the urgency for a rate increase. The market now leans toward October or December as the more likely timing if the Fed does take action. Although inflation remains well above the Fed's 2% target, two consecutive months of modest monthly increases suggest that the inflation surge driven by energy prices earlier this year is easing. The Fed's next policy meeting is not until September, when officials will also have an additional month's inflation data.
The mild reading further reduced market expectations for a Federal Reserve rate hike in September.
Energy prices fell another 1.5% from the previous month, after plunging 5.7% in June. But prices were still up 14.7% from a year earlier, reflecting the earlier impact of conflict in the Middle East. Food and shelter costs each rose 0.1%. Shelter's increase was modest but still accounted for about two-thirds of the overall CPI gain. Within shelter, lodging away from home fell sharply by 2.8%, putting significant downward pressure on the shelter index.
Among other components, new-vehicle prices rose 0.1%, while prices for used cars and trucks increased 0.4%. Medical-care costs rose 0.4%, and airfares accelerated, rising 2.2%.
After the data were released, stock-index futures rose and Treasury yields fell across the curve. According to the CME FedWatch tool, traders further lowered the probability of a September Fed rate hike to 42%.
Allen Zentner, chief economic strategist for wealth management, said: "The in-line inflation data will continue to support the 'no need to hike' narrative that took shape after last week's employment report. There is still another inflation report before the September policy meeting, so the story could change. But unless the numbers deviate significantly, the Fed will most likely keep rates unchanged next month."
The market had previously priced in a September hike at a high probability, but an unexpected net loss of jobs in July, combined with volatility in energy prices, has significantly reduced the urgency for a rate increase. The market now leans toward October or December as the more likely timing if the Fed does take action.
Although inflation remains well above the Fed's 2% target, two consecutive months of modest monthly increases suggest that the inflation surge driven by energy prices earlier this year is easing. The Fed's next policy meeting is not until September, when officials will also have an additional month's inflation data.