Key Takeaways:
US consumer prices rose 3.4% in July from a year earlier, cooling slightly from June but leaving inflation well above the Federal Reserve's 2% target as energy costs surged.
US consumer prices rose 3.4% in July from a year earlier, easing from June's 3.5% reading but keeping inflation firmly above the Federal Reserve's 2% target as energy costs jumped 14.7% on the year, the Bureau of Labor Statistics said Wednesday. On a monthly basis, prices rose just 0.1% from June to July, a reversal of the pullback seen the prior month.
"I thought it was a very benign report, right down the strike zone," said Mark Zandi, chief economist at Moody's. Inflation is "still high but moving in the right direction," he said, "assuming the war in Iran fades to the background."
Core CPI, which strips out volatile food and energy, rose 2.5% over the 12 months ended in July, with the indexes for new vehicles, apparel and shelter all posting modest increases. Gasoline prices climbed 24.6% and fuel oil 39.1% over the year, while airline fares rose 25.5%. Food prices increased 3%, with the meats, poultry, fish and eggs index up 1.9% and dairy down 0.5%.
The reading leaves a September rate hike on the table, though odds favor an October move, with the Fed holding its benchmark rate at 3.5%-3.75% after a 9-3 vote last month in which three policymakers dissented in favor of an increase. "After more than five years of above-target inflation, policymakers want to see a clear and lasting trend before acting. Until then, this is a Fed in wait-and-see mode," Karen Manna, fixed income investment director at Federated Hermes, said in an email.
The oil shock has not pushed too much pressure onto grocery prices, economists said, though energy remains the sharpest strain on household budgets. Consumers paid a national average of $4.04 per gallon as of Wednesday, according to AAA, up from about $3.14 a year ago. "Food prices don't seem to be too bad, but there's a lot of mix in there," said Brian Bethune, an economics professor at Boston College. "Meat is way up, chicken is slightly down, egg prices have finally come back down, and now we have a problem with lettuce," he said, citing cyclospora outbreaks that have dampened demand for lettuce and weighed on the fruits and vegetables index.
The inflation picture is moderating even as other data point to a cooling consumer. Retail sales slipped 0.6% in July, the biggest drop since May, after a boost from government tax refunds faded, while existing home sales fell 1.7% to a seasonally adjusted annual rate of 4.06 million units as the median sales price hit a record $434,100. Wholesale inflation, measured by the producer price index, rose 4.7% in July from a year earlier, down from 5.5% in June, a sign consumer inflation could grind lower in the months ahead.
A Fed increase would raise borrowing costs across mortgages, credit cards and personal loans, adding to pressure on households already stretched by elevated energy and travel costs. The average 30-year fixed mortgage rate stood at 6.67% this week, Freddie Mac said, down slightly from 6.69% but above the 6.58% level a year ago. If energy prices continue to ease and the Iran conflict fades, Zandi said, "inflation will be within spitting distance of the Fed's target." If not, the central bank's next move — likely at its October meeting — could come sooner than markets expect.
This article is for informational purposes only and does not constitute investment advice.
