According to data from the U.S. Bureau of Labor Statistics (BLS) released on August 12, the Consumer Price Index rose 0.1% in July after falling 0.4% in June. On a year-over-year basis, inflation stood at 3.4%, down from 3.5% a month earlier.
Core inflation, which excludes food and energy prices, rose 0.2% for the month after remaining flat in June. On an annual basis, it declined from 2.6% to 2.5%.
It is the trend in core inflation that is of particular interest for monetary policy, as it allows for a better assessment of the sustainability of price pressures without taking into account the most volatile components.
At the same time, the composition of the July figure was uneven. Housing prices rose by 0.1% and accounted for about two-thirds of the total monthly increase in the CPI. The food index also rose by 0.1%, while energy prices fell by 1.5%.
On an annual basis, the situation remains less favorable for the U.S. central bank. Energy prices in July were 14.7% higher than a year earlier, including a 24.6% increase in gasoline prices. Food prices rose by 3%, and housing costs increased by 3.2%.
What This Means for the Fed
The July data somewhat weakens the case for an interest rate hike at the Fed’s September meeting, but does not resolve the question of the future trajectory of monetary policy.
As Reuters notes, following the release of the statistics, the futures market estimated the probability of the rate remaining in the 3.50–3.75% range at the September 15–16 meeting at approximately 55%. Expectations prior to the data release were close to this level.
The market reacted moderately positively to the report: yields on two-year U.S. Treasury bonds fell, and U.S. stock indices opened higher. This reflects easing concerns that the Fed would have additional grounds to tighten policy as early as September.
At the same time, it is still too early to expect the Fed to shift to easing policy anytime soon. Annual inflation at 3.4% remains significantly above the Fed’s target, and certain components of consumer prices continue to show strong growth.
Furthermore, the July report is only one part of the picture ahead of the September meeting. As economists note, the Fed will need to assess both new inflation data and the state of the labor market.
Thus, the current statistics are more likely to reduce the likelihood of further monetary tightening than to provide grounds for an imminent easing.
This has direct implications for global markets. Easing inflationary pressure in the U.S. reduces the likelihood of higher interest rates, which supports demand for stocks and bonds and, at the same time, may reduce the appeal of the dollar. Following the release of the CPI, yields on U.S. Treasury bonds fell, and the dollar weakened slightly, Reuters notes.
Another aspect is also important for the global economy: a further slowdown in U.S. inflation will be one of the key factors determining the cost of dollar-denominated financing and capital flows to emerging markets.
For now, the July data give the Fed an opportunity to adopt a wait-and-see stance. However, the final decision on the interest rate in September will depend not only on the CPI figure alone, but on a combination of data on inflation, employment, and economic activity.
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