US inflation rises moderately in July

US inflation rose moderately in July and the annual increase in inflation slowed to below 3% for the first time since early 2021, further strengthening expectations the Federal Reserve will cut interest rates next month.

The consumer price index increased 0.2%, in line with expectations in July, after falling 0.1% in June.
The main contributor to July’s figure was 0.4% increase in shelter, which includes rents, accounting for nearly 90% of the rose in the CPI.

Food and gasoline prices were unchanged in July after falling for two straight months.

Annualized CPI increased 2.9%, marking the first reading below 3% and smallest monthly gain since March 2021.

Annual consumer price growth has moderated considerably from a peak of 9.1% in June 2022 as higher borrowing costs cool demand.
While still elevated, inflation is moving towards the Fed’s 2% target.

So-called core CPI, which excludes the volatile food and energy components, rose 0.2% in July after rising 0.1% in June, while annualized core CPI advanced 3.2% last month, compared to 3.3% gain in June, in the smallest year-on-year increase since April 2021.

The report from the Labor Department added to a mild increase in producer prices in July suggesting that inflation was firmly back on a downward trajectory, which should allow the US central bank to focus more on the labor market amid growing concerns of a sharp slowdown.

The probabilities of a 50 basis points rate cut at the Fed’s September’s policy meeting are around 59%, with the remainder of bets on 25 basis points point cut, mostly reflecting the jump in the unemployment rate to near a three-year high of 4.3% in July.

On the other hand, economists argue the labor market would have to deteriorate considerably for the central bank to deliver a 50-basis-point interest rate cut.
The fourth straight monthly increase in the jobless rate was mostly driven by an immigration-induced rise in labor supply rather than layoffs.

The Fed has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range for more than a year, after a cycle of sharp increase in borrowing cost in 2022 and 2023.