The Labor Department reported on Wednesday that inflation rose as expected in July due to rising housing costs, making interest rate cuts likely to continue in September.
The consumer price index, a broad measure of the prices of goods and services, rose 0.2% this month, bringing the 12-month inflation rate to 2.9%. Economists surveyed by Dow Jones had expected rates of 0.2% and 3%, respectively.
Core CPI, excluding food and energy prices, increased 0.2% from the previous month and 3.2% annualized, in line with expectations.
The Bureau of Labor Statistics reported that annual inflation was at its lowest since March 2021, and core inflation was at its lowest since April 2021. Headline inflation was 3% in June.
A 0.4% rise in housing costs accounted for 90% of the increase in total inflation. Food prices rose 0.2% while energy prices were stable.
Stock market futures fell slightly after the report, while Treasury yields broadly rose.
Food inflation moderated this month, but several categories saw large increases, notably eggs, which rose 5.5%, cereals and bakery products, which fell 0.5%, and dairy and related products, which fell 0.2%.
Inflation is gradually creeping back toward the central bank’s 2% target. Producer prices, a measure of the wholesale price index, rose just 0.1% in July and were up 2.2% from a year earlier, according to a Labor Department report released Tuesday.
Fed officials have signaled their intention to ease monetary policy, but have been careful not to commit to a specific timeline or speculate on the pace of rate cuts. Futures markets are currently pricing a quarter-percentage-point cut at the next meeting on Sept. 17-18 as somewhat more likely, with at least one percentage point of cuts expected by the end of 2024.
“Today’s CPI release removes a lingering inflation obstacle that may have prevented the Fed from beginning a rate-cutting cycle in September,” said Seema Shah, chief global strategist at Principal Asset Management. “But the numbers also suggest there is limited urgency for a 50-basis-point rate cut.”
As inflation eases, concerns about a slowing labor market are growing, making it seem more likely that the Fed will begin cutting interest rates for the first time since the early days of the coronavirus crisis.
“We’re trending lower, but the volatility remains volatile,” Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., said of the CPI report. “We need to keep a close eye on both the inflation data and the jobs data.”
There were some conflicting opinions in the report that certainly suggested inflation was persistent in some areas.
Auto prices continued to fall, with new cars down 0.2% and used cars and trucks down 2.3% from the previous month and 10.9% from a year ago. However, auto insurance rates rose a further 1.2% to be up 18.6% on a trailing-month basis.
Among housing-related items, which make up more than a third of the index, a question asking property owners how much they can get in rent rose 0.4%, bringing the annual increase to 5.3%, again contradicting the Fed’s expectations for an easing in housing costs.
Meanwhile, there were signs of month-on-month deflation in several sectors, including health services (-0.3%), apparel (-0.4%) and core commodity prices (-0.3%).
