A cooler-than-expected inflation picture in July is likely to reinforce expectations that the Federal Reserve will leave interest rates unchanged at its September meeting.
Core Consumer Price Index (CPI), which excludes volatile food and energy prices, rose 2.5% over the past year, matching economists’ expectations and slowing from 2.6% in June. On a monthly basis, core CPI increased 0.2%, also in line with forecasts. The Fed closely watches core inflation because it provides a clearer view of underlying price pressures, which can be obscured by swings in food and energy costs.
“The U.S. July Consumer Price Index reflected a mild pace of growth in inflation that should result in the Federal Reserve, pending other July and September pricing data, to remain on hold when they make their next policy decision,” said RSM chief economist Joseph Brusuelas.
The July report marked the second consecutive month of easing core inflation. Core CPI fell to 2.6% in June from 2.9% in May. Still, renewed tensions involving Iran have contributed to volatility in energy markets, potentially creating additional pressure on both headline and core inflation in the months ahead.
The inflation data also comes on the heels of a weak July jobs report, which showed the U.S. economy losing 23,000 jobs during the month.
“In-line inflation will keep the ‘no need to hike rates’ narrative that took hold after last week’s jobs report intact,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “There will be another round of inflation data before the September FOMC meeting, so the storyline could still change. But unless those numbers tell a much different story, the Fed will likely still be in a position to leave rates unchanged next month.”
Fed Governor Lisa Cook, who supported keeping rates unchanged at the Fed’s July meeting, said last week that she would be prepared to act if inflation fails to show signs of further improvement. At the same time, she said policymakers would need to weigh any rate increase against its potential impact on the labor market and noted that a hike may not be necessary if existing disinflationary forces continue to take hold.
Cook’s position reflects the broader stance of voting Federal Open Market Committee members, most of whom currently favor keeping rates steady. New York Fed President John Williams, who also backed a hold, recently said monthly core inflation readings of 0.2% or lower would suggest inflation is continuing to move toward the Fed’s 2% target without additional policy tightening.
The latest CPI report could give policymakers another reason to remain patient.
Still, the Fed will ultimately be looking to its preferred inflation gauge, the core Personal Consumption Expenditures (PCE) price index, for further confirmation. Thursday’s producer price report will provide another important data point, as PPI and CPI are used together to help estimate components of the PCE measure.
