Receive free US inflation updates
We’ll send you a myFT Daily Digest email rounding up the latest US inflation news every morning.
US headline inflation in July rose slightly from June, a smaller than expected increase that supports the case for the Federal Reserve to hold interest rates steady at its next meeting in September.
The Bureau of Labor Statistics on Thursday reported that the consumer price index (CPI) rose 0.2 percentage points month on month, matching June’s increase. The annual rate climbed to 3.2 per cent in July from the previous month’s 3 per cent figure, which marked the slowest pace since March 2021.
The slight rise in the annual headline rate does not suggest a meaningful acceleration in inflation, but instead reflects so-called base effects related to soft data in July 2022.
Core inflation, which strips out the volatile food and energy components of the calculation, increased 0.2 per cent during July, the same rate as the previous month. The annual figure was 4.7 per cent, a slower pace than June, and the lowest level since October 2021.
The monthly figures for both headline and core inflation were in line with expectations of analysts polled by Refinitiv, while the annual figures were slightly below forecasts.
Following the release of the data, traders in the futures market added to bets that the Fed would keep interest rates steady in September, putting the likelihood of a pause at 91 per cent.
“I’m encouraged by the data. This keeps the Fed on pause for September. The CPI, the jobs report last week and ECI data all suggest that the Fed can pause,” said David Kelly, chief global strategist at JPMorgan Chase.
After hitting a peak rate of 9.1 per cent last summer, headline inflation has been moving closer to the Fed’s 2 per cent target. Core inflation, however, has remained stubbornly high, putting pressure on the US central bank to keep interest rates higher for longer.
July’s report, in particular the improvement in core inflation, may ease pressure on the Fed to raise rates further this year.
In a year and a half, the Fed has raised interest rates from near zero to a 22-year high of 5.25-5.5 per cent. Fed chair Jay Powell said last month that the central bank would decide on further rate increases on a meeting-by-meeting basis.
Shelter costs, which are associated with housing, were the largest contributor to the monthly headline figure, accounting for more than 90 per cent of July’s increase. House prices and rents have on the whole been cooling in recent months, and the improvements are expected to eventually show up in the data.
“Though shelter inflation is sticky, the CPI lags market rents by roughly a year. Therefore, we know that the CPI for shelter is set to moderate noticeably through the remainder of this year,” said Ryan Sweet, chief US economist at Oxford Economics.
Stock markets were initially up after the data, but had swung into the red during mid-afternoon trading. The blue-chip S&P 500 index was up 0.1 per cent, having risen as much as 1.3 per cent earlier in the day. The tech-heavy Nasdaq Composite was up 0.1 per cent. Both indices were still on track for their first positive day in three.
The two-year Treasury yield, which moves with interest rate expectations, reversed course to be 0.04 percentage points to 4.84 per cent.
“It’s clear that the disinflationary process is well under way. This of course increases the already high odds that the Fed will not hike rates in September,” said Kristina Hooper, chief global market strategist at Invesco.