Consumer prices climbed modestly in July, offering fresh evidence that an earlier surge in inflation may be gradually losing its force.
The consumer price index increased a seasonally adjusted 0.1% during July, according to the Bureau of Labor Statistics, placing the annual inflation rate at 3.4%.
Excluding food and energy, the so-called core CPI rose 0.2% for the month, bringing its annual rate to 2.5%, both figures down 0.1 percentage point from June.
All readings came in exactly in line with the Dow Jones consensus forecasts, removing any element of surprise for markets watching closely for signals on monetary policy.
Stock market futures moved higher following the release, while Treasury yields fell across the board in response to the softer inflation data.
Traders trimmed the probability of a September rate hike to 42%, according to the CME Group’s FedWatch gauge of futures prices, a notable shift from expectations just days earlier.
Energy prices dropped 1.5% for the month, following a 5.7% decline in June, though the sector still posted a steep annual gain of 14.7% after a 10.9% surge in March when attacks against Iran began.
Shelter costs, long a stubborn driver of elevated inflation, rose only 0.1% in July, though the category still accounted for roughly two-thirds of the headline monthly increase, the BLS noted.
A 2.8% decline in lodging away from home helped restrain the shelter index, while a key measure tracking what property owners could charge in rent increased 0.3%.
Medical care prices rose 0.4% and airline fares accelerated by 2.2%, while new vehicle prices edged up 0.1% and used cars and trucks gained 0.4% for the month.
Though inflation remains well above the Federal Reserve’s 2% target, the consecutive months of modest readings suggest the energy-driven spike earlier this year is fading, even as conditions remain volatile.
“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 for Morgan Stanley Wealth Management.
“There will be another round of inflation data before the September FOMC meeting, so the storyline could still change,” Zentner added, “but unless those numbers tell a much different story, the Fed will likely still be in a position to leave rates unchanged next month.”
Renewed concern about the labor market, following a net job loss in July, combined with volatility in energy prices, has further reduced the urgency around an imminent rate increase.
At its July meeting, the Federal Open Market Committee voted 9-3 to hold its benchmark rate steady, with all three dissenters pushing for a hike, and markets are now leaning toward a potential move in October or December instead.
