U.S. consumer prices barely increased in July as gasoline costs declined for a second consecutive month, while underlying inflation remained relatively subdued, reducing pressure on the Federal Reserve to raise interest rates at its September meeting.
The Consumer Price Index (CPI) rose 0.1% in July after falling 0.4% in June, according to data released by the Labor Department’s Bureau of Labor Statistics on Wednesday.
The July increase was in line with economists’ expectations and reflected modest increases in food and apparel prices, alongside declines in hotel and motel rates and prescription medication costs.
The latest inflation data followed a report last week showing unexpected job losses in July, adding to expectations that the Federal Reserve may have less reason to tighten monetary policy in the near term.
Still, economists said a rate increase later this year remained possible because inflation continues to run above the central bank’s 2% target.
“In-line inflation will keep the ‘no need to hike rates’ narrative that took hold after last week’s jobs report intact,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.
She noted that another round of inflation data would be released before the Fed’s September meeting, meaning the outlook could still change.
Shelter prices increased 0.1% in July and accounted for roughly two-thirds of the monthly increase in the overall CPI.
The rise in shelter costs was moderated by a 3.3% decline in hotel and motel prices, which economists linked partly to the conclusion of the FIFA World Cup tournament.
That decline offset a 0.3% increase in owners’ equivalent rent.
Gasoline prices also fell 2.9% in July, following a much larger 9.7% decline in June.
Despite the modest monthly increase, consumer prices remained significantly higher than a year earlier.
The CPI rose 3.4% in the 12 months through July, compared with a 3.5% increase in June.
Core CPI, which excludes volatile food and energy prices, increased 0.2% in July after remaining unchanged in June.
On an annual basis, core CPI rose 2.5% in July, slowing from 2.6% in June.
The latest figures suggest that inflationary pressures have not accelerated sharply, although prices remain elevated for American households.
The cost of living has become an increasingly important political issue, with persistent price increases weighing on public sentiment toward President Donald Trump.
Trump won the 2024 presidential election partly on promises to reduce inflation, and continued pressure from high prices could influence Republican prospects in the November midterm elections, which will determine control of the U.S. Congress for the next two years.
The Federal Reserve uses the Personal Consumption Expenditures price indexes as its preferred measure for its 2% inflation target.
Financial markets were pricing in approximately a 40% probability of a rate increase at the Fed’s September 15-16 policy meeting following the CPI report, slightly below expectations earlier in the day.
However, policymakers will receive another set of inflation and employment figures before the September meeting.
Economists expect consumer price growth to accelerate somewhat in August, partly because of recent increases in oil prices. Job growth is also expected to improve as seasonal distortions fade.
The Fed left its benchmark overnight interest rate unchanged last month in a range of 3.50% to 3.75%.
Following the inflation data, the U.S. dollar weakened against a basket of major currencies in early trading, while U.S. Treasury yields declined.
The outlook for energy prices remains another source of uncertainty for inflation.
The United States’ position as a net oil exporter and the drawdown of petroleum inventories have helped cushion the economy from the impact of higher oil prices linked to the Middle East conflict.
However, economists warned that the effect may not last indefinitely, as the U.S. and other countries will eventually need to replenish depleted petroleum inventories.
That could keep oil prices elevated and add pressure to consumer prices in the coming months.
The latest inflation report therefore provides some relief for the Federal Reserve but is unlikely to settle the debate over the direction of interest rates.
With another inflation report and employment data due before the September meeting, policymakers will continue to assess whether price pressures are easing sufficiently to maintain the current interest rate range or whether further action will be required.
