In July, the United States witnessed consumer inflation rise as anticipated, while notably, the annual pace of price growth unexpectedly decelerated, bolstering the prevailing sentiment that the Federal Reserve is primed to initiate a monetary policy easing in September. According to the Bureau of Labor Statistics, the consumer price index climbed by 0.2% in July, following a modest decline of 0.1% in June.
This latest figure aligns with insights gleaned from a Bloomberg-compiled survey. Year-over-year, inflation ticked down to 2.9% last month, marking the slowest pace of growth since March 2021, diverging from the consensus which had predicted a steady annualized metric of 3% growth. TD Senior Economist Thomas Feltmate remarked in a recent note, "With the labor market exhibiting clear signs of cooling and inflationary pressures subsiding, the (Fed) can confidently start to dial back its policy rate in September." Currently, the markets are estimating a roughly 57% likelihood that the Federal Reserve's Federal Open Market Committee will decide to reduce its benchmark lending rate by 25 basis points in the upcoming month.
The remaining probabilities suggest the possibility of a more assertive 50-basis-point cut, as outlined by the CME FedWatch tool. In regards to food prices, the monthly growth remains stable at 0.2% for July, while energy indices reported no change, according to BLS findings. On an annual basis, food prices increased by 2.2%, and energy prices experienced a slight rise of 1.1%. Core inflation, which intentionally excludes the fluctuating food and energy prices, increased by 0.2% in July, a rise from the previous month's rate of 0.1%, aligning seamlessly with analyst forecasts.
Annual core inflation landed at 3.2%, meeting general expectations. Despite the observed uptick in the monthly readings for both headline and core inflation, Feltmate noted, "price pressures remained relatively subdued in July." Shelter cost growth saw a sequential acceleration to 0.4% from June's 0.2%, contributing significantly to nearly 90% of the monthly increase reflected in the July headline index, as indicated in the BLS report.
Over the year, shelter prices witnessed a notable rise of 5.1%. It’s essential to recognize that shelter costs exert a comparatively minor influence on core personal consumption expenditures inflation, which remains the Federal Reserve's preferred inflation metric, according to Feltmate's observations..