U.S. consumer prices increased by less than expected on an annualized basis in July, increasing the likelihood that the Federal Reserve will start cutting interest rates at its next meeting in September.
The Labor Department’s consumer price index (CPI) rose by 2.9% last month, decelerating slightly from 3.0% in June. Economists had predicted that the figure would match June’s rate.
Month-on-month, the reading climbed to 0.2% after actually falling 0.1% last month, matching expectations.
“The details of the CPI report were a little disappointing, however, with rent increasing by a bigger 0.5% m/m and OER up 0.4%,” analysts at Capital Economic said, in a note. “After the more modest gains in June and the sharp slowdown in the all tenant rent index measure of housing inflation, we had expected the weaker June gains to become the new norm.”
Stripping out more volatile items like food and fuel, the “core” number climbed by 3.2% in the twelve months to July, below projections of 3.3%. On a monthly basis, underlying price growth inched up to 0.2%, after rising 0.1% in June.
“Core goods prices fell more than we expected, led by another large (-2.3%) decline in used vehicle prices. Core services inflation was a bit hotter than anticipated, led by rebounds in inflation for housing, recreation and communication services,” said analysts at Wells Fargo, in a note.
“The 0.15% m/m increase in all-items CPI and the 0.18% m/m increase in core CPI in July suggest that the disinflationary trend has firmly reasserted itself, after the temporary relapse in the first quarter,” said Capital Economics.
“Overall, July’s CPI report is probably best described as mildly encouraging – it adds support for a 25bp rate cut in September but, at the same time, doesn’t suggest price pressures are collapsing in a way that could warrant a bigger 50bp reduction.”
This release followed Tuesday’s cooler-than-expected July producer price index, and confirms the generally benign inflationary pressures, which could allow the U.S. central bank to cut its policy rate from the 5.25%-5.50% range it has been in for more than a year.
The benchmark stock indices on Wall Street have traded in a mixed fashion Wednesday, after the previous session’s sharp gains, with the blue chip Dow Jones Industrial Average around 0.2% higher, while the broad-based S&P 500 and the tech-heavy NASDAQ Composite traded marginally lower.
“Feels like today’s print was pre-traded with yesterday’s PPI,” said analysts at JPMorgan, in a note, “and with the disinflation story intact, tomorrow’s retail sales [number] is necessary to assuage (or confirm) growth concerns.”
The payrolls report at the start of the month showed that U.S. jobs growth slowed more than expected in July, heightening fears that the labor market is deteriorating and potentially making the economy vulnerable to a recession.
“Today’s data leave the FOMC in a holding pattern and do not settle the 25 bps or 50 bps debate for September,” Wells Fargo added.
“The continued steady slowdown in inflation, when paired with the rise in the unemployment rate and deterioration in other labor market indicators, leads us to believe the FOMC will want to move quickly towards a more neutral policy stance in the months ahead,” Wells Fargo added.
“As a result, we expect a 50 bps rate cut at the September FOMC meeting, but the decision ultimately may be determined by the August employment report to be released on September 6 and the August CPI report to be released on September 11.”
Chair Powell’s expected speech at the Jackson Hole conference on August 23 also looms large as the FOMC weighs the balance of risks to its dual mandate, Wells Fargo noted.
