U.S. inflation sees moderate increase in July
U.S. inflation rose moderately in July, with the annual rate dropping below 3% for the first time since early 2021, reinforcing expectations that the Federal Reserve might cut interest rates next month.
The Consumer Price Index (CPI) increased by 0.2% in July, matching expectations, following a 0.1% decline in June. The primary driver of July’s increase was a 0.4% rise in shelter costs, which includes rent, accounting for nearly 90% of the overall CPI increase.
Food and gasoline prices remained unchanged in July after two consecutive months of declines.
The annualized CPI grew by 2.9%, marking the first time it has fallen below 3% and the smallest monthly gain since March 2021.
Annual consumer price growth has significantly moderated from its peak of 9.1% in June 2022, as higher borrowing costs have cooled demand. While inflation remains elevated, it is gradually moving toward the Fed’s 2% target.
Core CPI, which excludes volatile food and energy prices, rose by 0.2% in July, following a 0.1% increase in June. The annualized core CPI advanced by 3.2% last month, compared to a 3.3% gain in June, marking the smallest year-on-year increase since April 2021.
The Labor Department’s report, combined with a slight rise in producer prices in July, suggests that inflation is on a steady downward trajectory, potentially allowing the Federal Reserve to shift its focus to the labor market amid concerns of a sharp economic slowdown.
The likelihood of a 50 basis point rate cut at the Fed’s September meeting is around 59%, with the remaining bets on a 25 basis point cut, largely due to the unemployment rate’s jump to a nearly three-year high of 4.3% in July.
However, some economists argue that the labor market would need to deteriorate significantly for the Fed to implement a 50-basis-point rate cut. The fourth consecutive monthly increase in the jobless rate was primarily driven by an immigration-induced rise in labor supply rather than layoffs.
The Fed has kept its benchmark overnight interest rate in the 5.25%-5.50% range for over a year, following a cycle of sharp rate increases in 2022 and 2023.
