On Wednesday, August 12, the United States released key inflation data for July, showing a slight easing of overall price pressures, largely driven by consecutive declines in energy prices. This may reduce the urgency for the Federal Reserve to raise interest rates in September.
According to data released by the Bureau of Labor Statistics on Wednesday, the Consumer Price Index (CPI), a key inflation gauge for the Fed, rose by 0.1% in July after seasonal adjustments. Excluding food and energy prices, the core CPI increased by 0.2%.
On an annual basis, the CPI for July had a year-on-year increase of 3.4%, while the core CPI had a 2.5% year-on-year increase. These figures were in line with the general expectations of economists surveyed by Dow Jones.
Despite inflation levels being well above the Fed’s 2% target, the modest monthly increase in July, coupled with recent declines in energy prices, suggests that the inflationary pressures driven by earlier increases in oil prices are weakening.
Following the release of the CPI data, stock index futures rose, and bond yields saw a broad decline. According to the FedWatch tool by the CME Group, traders further reduced the likelihood of a rate hike in September to 42%.
One of the main reasons for the overall inflation slowdown in July was energy. After a 5.7% decline in June, energy prices fell again by 1.5% in July. However, energy prices are still influenced by changing situations in the Middle East, with prices having risen by 14.7% since the beginning of the year.
At the same time, several prices closely related to daily life have also started to moderate their increases.
In July, both food and housing prices rose by 0.1%. Housing costs have always been a key factor in maintaining inflation rates above 2%. According to data from the Bureau of Labor Statistics, although the increase may not be significant, housing costs still contribute to around two-thirds of the overall inflation increase.
New car prices rose by 0.1%, while prices for used cars and trucks increased by 0.4%, healthcare prices by 0.4%, and airline ticket prices by 2.2%.
The Federal Open Market Committee (FOMC), the Federal Reserve’s interest rate-setting body, is scheduled to hold its policy meeting in September. Prior to that, the inflation data for August will be released, so the policy outlook could still change.
Ellen Zentner, Chief Economist at Morgan Stanley Wealth Management, stated that the July inflation data meeting expectations reinforces the market view formed after last week’s employment report that “no rate hike is needed.”
She predicts that unless the August inflation data shows a significant reacceleration of price pressures, the Fed is likely to keep interest rates unchanged in September.
Just about a week ago, the market widely expected the Fed to raise rates in September. However, the slowdown in job growth in July raised concerns about the labor market, combined with recent volatility in the energy industry, leading to a reduced urgency for a rate hike. The market currently sees a higher likelihood of a rate hike in October or December.
At the July meeting, the FOMC voted 9-3 to maintain the key rate unchanged, with all dissenting voters supporting a rate hike.