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- US CPI rose 0.1% MoM in July, while annual inflation eased to 3.4%, with both headline and core readings matching forecasts.
- Shelter remained a key source of inflationary pressure, while falling gasoline and hotel prices helped limit the overall increase.
- Traders reduced the probability of a September rate hike to around 36%, strengthening the case for the Fed to remain on hold.
Fresh inflation data that was released yesterday gave the Federal Reserve one less reason to raise interest rates next month. July’s CPI data matched what economists had expected and adding to signs that the sharp price gains seen earlier this year are fading.
The report landed just a week after a weak jobs reading, and together the two releases have shifted market expectations toward a Fed that stays on hold in September.
Headline Numbers Match Forecasts
The Bureau of Labor Statistics reported that July’s CPI rose 0.1% MoM in July, rebounding from a 0.4% decline in June, while annual inflation eased to 3.4% from 3.5%, while the yearly figure came in at 3.4%, slightly below June’s 3.5% figure. ⁽¹⁾
Core CPI rose 0.2% MoM after a flat reading and 2.5% YoY. Both figures came in exactly where Wall Street had penciled them in, leaving little room for surprise reactions in markets. ⁽²⁾
Shelter Costs Still Doing Most of the Work
Shelter costs remained a major source of inflation, rising 3.2% over the year. In July alone, the shelter index increased just 0.1%, but because it represents roughly 35% of the CPI basket, it accounted for about two-thirds of the overall monthly increase.
Within the category, rent and owners’ equivalent rent both rose 0.3%. However, these increases were partly offset by a 2.8% decline in lodging away from home, including a 3.3% drop in hotel and motel rates, possibly reflecting weaker demand following the end of the FIFA World Cup. ⁽³⁾
Beyond housing, prices moved in mixed directions. New vehicle costs edged up 0.1% and used cars and trucks rose 0.4%. Medical care climbed 0.4% and airline fares jumped 2.2%, while food and apparel saw only small increases. ⁽⁴⁾
Energy Prices Keep Falling
The overall energy index fell 1.5% in July, led by a 2.9% decline in gasoline prices following a 9.7% drop in June. Nevertheless, energy costs remain 14.7% higher than a year ago, while gasoline prices are up 24.6%, reflecting the lingering effects of the energy shock that began in March. ⁽⁵⁾
Analysts stated that the America’s position as a net oil exporter, alongside a drawdown of existing petroleum inventory, has helped protect the broader economy from the earlier shock. ⁽⁶⁾
However, some economists cautioned that this protection will not last forever, since inventories will eventually need to be rebuilt, which could cause prices to rise again. ⁽⁷⁾
Rate Hike Odds Drop Further
After the release, traders scaled back on their expectations of a September rate hike to around 36%. That comes after last month’s Fed meeting, where policymakers voted 9-3 to hold rates steady in a range of 3.50% to 3.75%, with the three dissenters favoring a hike. ⁽⁸⁾
In-line inflation data could reinforce the case for the Fed to stay patient, though another round of data is due before the September meeting and could still shift the outlook.
The US dollar strengthened modestly later in the session, supported by persistent geopolitical tensions in the Middle East despite lower Treasury yields.
Gold edged lower on Thursday after reaching a more than two-month high, as traders turned their attention to the upcoming producer price report for further clues about the Fed’s next move.
Political Stakes Rising
The cost of living remains a sensitive issue heading into the November midterm elections, which will decide control of Congress. Persistently high prices have weighed on views of President Trump, who had campaigned in 2024 on bringing inflation down. ⁽⁹⁾
Overall, the report strengthened the case for the Fed to remain on hold in September, but it did not eliminate the possibility of another increase later this year. Policymakers will receive another round of inflation and employment data before the meeting, while renewed energy-price pressures remain the biggest threat to the improving outlook.
