U.S. consumer prices increased moderately in July, with higher rents being offset by declining costs of goods such as motor vehicles and furniture. This trend could lead the Federal Reserve to keep interest rates unchanged next month. The report from the Labor Department also showed that underlying inflation pressures decreased last month, with the annual increase in prices excluding food and energy components being the smallest in nearly two years.
Economists believe that moderate inflation, along with a cooling labor market, supports the idea that the U.S. central bank will be able to achieve a “soft landing” for the economy. This comes after concerns about a recession over the past year. Will Compernolle, a macro strategist at FHN Financial in New York, stated that the inflation report is encouraging and solidifies expectations for the Fed to leave rates unchanged in September.
The consumer price index (CPI) rose 0.2% in July, matching the gain in June. The increase was mainly driven by higher rental costs, which accounted for over 90% of the CPI increase. Food prices also rose by 0.2%, with grocery food prices increasing by 0.3%. Energy product costs edged up by 0.1%, primarily due to a slight increase in gasoline prices. The CPI advanced 3.2% in the 12 months through July, following a 3.0% rise in June.
The annual CPI rate increased for the first time in 13 months, calculated from a lower base after prices subsided last July. Annual consumer prices have come down from a peak of 9.1% in June 2022. The Fed has a 2% inflation target.
Economists had predicted a 0.2% increase in the CPI last month and a 3.3% increase on a year-on-year basis. The CPI report is one of two before the Fed’s September policy meeting. Financial markets expect the central bank to keep its policy rate unchanged at that meeting.
Excluding food and energy, the CPI gained 0.2% in July, matching the rise in June. The core CPI, which excludes volatile components, increased by 4.7% year-on-year. This was the smallest year-on-year advance since October 2021. Core goods prices decreased by 0.3%, driven by a drop in used cars and trucks prices. Services inflation remained steady, rising by 0.3% for the third consecutive month. Higher rental costs contributed to the increase in services inflation.
The inflation outlook was further improved by a separate report from the Labor Department, which showed an increase in initial claims for state unemployment benefits. Economists are optimistic that labor costs will be contained, as worker productivity is rising. The number of people receiving benefits after an initial week of aid, a proxy for hiring, fell during the week ending July 29.
In conclusion, U.S. consumer prices increased moderately in July, with higher rents being offset by declining costs of goods. This could lead the Federal Reserve to keep interest rates unchanged. The annual increase in prices excluding food and energy components was the smallest in nearly two years. Economists believe that moderate inflation and a cooling labor market will allow for a “soft landing” for the economy. The CPI rose 0.2% last month, mainly driven by higher rental costs. Food prices and energy product costs also increased. The annual CPI rate increased for the first time in 13 months. Excluding food and energy, the CPI gained 0.2% in July, while core goods prices decreased. Services inflation remained steady, lifted by higher rental costs. The inflation outlook was further improved by a decrease in initial claims for state unemployment benefits.
