US core inflation registered a subdued performance in July, potentially offering the Federal Reserve increased flexibility as it weighs its next move on interest rates. Data released on Wednesday by the Bureau of Labor Statistics indicated a significant easing of price pressures, particularly when volatile food and energy components are excluded.
Core CPI Rises Modestly
The consumer price index (CPI), excluding the often-fluctuating categories of food and energy, increased by a modest 0.2% in July compared to the previous month. On an annual basis, core CPI advanced by 2.5%, matching its slowest pace recorded since March 2021. This development comes as policymakers consider the impact of cooling prices against a backdrop of a recent slowdown in hiring.
Overall consumer prices saw a 0.1% month-on-month increase and a 3.4% rise from a year earlier.
Reduced Pressure on the Federal Reserve
This latest inflation report could alleviate some of the pressure on Federal Reserve officials to raise borrowing costs during their upcoming September 15-16 meeting. The fading impact of the energy-price shock, partly linked to the Iran war, also contributes to this outlook. The Fed will receive additional inflation and employment data before its September gathering, with investors also keenly awaiting remarks from Fed Chair Kevin Warsh at the Jackson Hole symposium later this month.
“It’s good news for those Fed officials who want to be patient here,” stated Oscar Munoz, head of US economics at TD Securities. “At least for the Fed officials who are looking for signs of progress, disinflation, it’s a second consecutive report.”
Following the report's release, US stocks experienced an uptick, while Treasury yields declined as market participants adjusted their expectations regarding a September rate hike.
Sectoral Price Movements
Energy and Food Prices Ease
Energy and gasoline prices declined for the second consecutive month. Despite US gasoline prices briefly surpassing $4 a gallon in July after a breakdown in the US-Iran ceasefire, average prices for the month remained below June's levels. Grocery prices also saw a decline for the first time since March, partly due to a record drop in lettuce prices amid a cyclospora outbreak. Uncooked ground beef prices fell 1.6%, marking their steepest decline since 2020.
Shelter and Services
Shelter costs edged up 0.1%, with a notable 3.3% decline in hotel and motel prices offsetting a 0.3% rise in measures tracking rents. Services prices, excluding energy and rents, increased by a modest 0.2%, rebounding after a decline in the preceding month. Categories such as medical care and airfares recorded price increases.
Technology Prices Rebound
Goods prices, excluding food and energy commodities, increased after two consecutive monthly declines. Computer software and accessories prices surged by 21.2% from a year earlier, marking the largest increase on record. Prices for computers, peripherals, and smart-home assistants posted their strongest annual gains in over four years. Economists are closely monitoring these increases in consumer technology products, including Apple Macs and iPads, attributing them partly to a global memory-chip shortage driven by demand from data-center construction.
While the July CPI report was modest enough to reduce the likelihood of a September rate hike, Bloomberg Economics noted it did not entirely eliminate the possibility. Further insights are expected from producer-price data and the personal consumption expenditures (PCE) inflation measure later this month. A separate report also indicated that real average hourly earnings fell 0.2% year-on-year in July, continuing a period of weak readings.