Inflation rose as expected in July, driven by higher housing costs, according to a Labor Department report Wednesday, likely keeping interest rate cuts on the table in September.
The consumer price index, a broad measure of prices for goods and services, rose 0.2% during the month, taking the 12-month inflation rate to 2.9%. Economists polled by Dow Jones had expected readings of 0.2% and 3%, respectively.
Excluding food and energy, the core CPI came in at a monthly increase of 0.2% and an annual rate of 3.2%, in line with expectations.
According to the Bureau of Labor Statistics report, the annual rate is the lowest since March 2021, while the core rate is the lowest since April 2021. The overall inflation rate was 3% in June.
A 0.4% rise in housing costs accounted for 90% of the increase in inflation across all goods. Food prices rose 0.2% while energy prices remained flat.
Stock market futures were slightly negative after the report, while Treasury yields were mostly higher.
Although food inflation was weak during the month, several categories saw significant increases, most notably eggs, which rose 5.5%. Prices of cereals and bakery products fell 0.5%, while prices of dairy and related products fell 0.2%.
Inflation readings have been gradually easing back toward the central bank’s 2% target. A Labor Department report Tuesday showed producer prices, a proxy for wholesale inflation, rose just 0.1% in July and were up 2.2% on a year-over-year basis.
Fed officials have signaled a willingness to ease monetary policy, though they have been careful not to commit to a specific timetable or speculate on the pace at which cuts might occur. Futures market prices currently point to a slightly better chance of a quarter-point cut at the Fed’s next meeting on Sept. 17-18, and at least a full point in moves by the end of 2024.
“Today’s CPI reading removes any remaining inflationary hurdles that might have prevented the Fed from starting its rate-cutting cycle in September,” said Seema Shah, chief global strategist at Principal Asset Management. “However, the number also suggests limited urgency for a 50bp cut.”
With inflation falling, growing concerns about a slowing labor market appear to have increased the likelihood that the Federal Reserve will begin cutting interest rates for the first time since the early days of the Covid crisis.
Describing the CPI report, Liz Ann Saunders, chief investment strategist at Charles Schwab, said: “We are heading lower, but the tough spots are still tough. We have to keep a close eye on both the inflation data and the employment data.”
The report included several conflicting trends that indeed suggest that inflation is continuing to struggle in some areas.
Auto prices continued to decline, with new vehicle prices down 0.2% and used car and truck prices down 2.3% for the month and 10.9% from a year ago. However, auto insurance costs rose another 1.2% and were up 18.6% year over year.
As for the shelter component, which makes up more than a third of the index, the item asking landlords what they can get for rent rose 0.4% and rose 5.3% annually, again defying the Federal Reserve's expectations of easing housing costs.
On the other hand, several categories showed signs of contraction during the month, including medical care services (-0.3%), clothing (-0.4%) and commodity prices (-0.3%).
