Consumer prices showed a faster year-over-year increase in July compared to the previous month’s annual gain, according to the latest data from the Bureau of Labor Statistics released Thursday morning.
The Consumer Price Index (CPI) rose 3.2% in July over the prior year, a slight acceleration from June’s 3% annual increase. Prices were up 0.2% in July from the previous month, in line with June’s 0.2% month-over-month increase.
Both measures were roughly in line with economist forecasts, according to data from Bloomberg.
On a “core” basis, which strips out the more volatile costs of food and gas, prices in July climbed 0.2% over the prior month and 4.7% over last year — roughly on par with June. Both measures were also in line with economist expectations.
The annual core increase was the smallest increase in that index since October 2021.
Rent prices continue to surge. The index for rent and owners’ equivalent rose 0.4% and 0.5% on a monthly basis, respectively. Owners’ equivalent rent is the hypothetical rent a homeowner would pay.
The shelter index was the largest factor in the monthly increase of core inflation. Among the other indexes that rose in July was the index for motor vehicle insurance, which increased 2.0% on a monthly basis after rising 1.7% the preceding month. The indexes for education and recreation also increased in July, the BLS noted.
Still, other indexes did see prices soften such as airline fares, which fell 8.1% — its fourth consecutive monthly decline — along with the prices for used cars and trucks, which dropped 1.3% in July after seeing prices fall 0.5% in June.
The energy index decreased 12.5% for the 12 months ending in July, although prices increased 0.1% on a seasonally adjusted month-over-month basis.
The food index increased 4.9% in July over the last year, with food prices rising 0.2% from June to July. Egg prices fell another 2.2% month-over-month after dropping 7.3% in June and 13.8% in May.
US stocks ticked higher in early trading following the release of the data. Treasury yields fell about 4 basis points to trade around 3.9%.
To hike or not to hike?
Inflation has remained significantly above the Federal Reserve’s 2% target.
That, along with a labor market that Fed Chair Jerome Powell has described as “very tight,” suggests the Federal Reserve will continue to raise interest rates later this year. But markets now widely expect the central bank to pause its hikes at its meeting next month.
Following the release of the data, markets were pricing in a roughly 90% chance the Federal Reserve keeps rates unchanged at its Sept. 20 policy meeting, according to data from the CME Group.
The central bank raised rates by another 0.25% in July after pausing its aggressive rate-hiking cycle in June.
“Today’s inflation report was reminiscent of the good old days,” George Mateyo, chief investment officer at Key Private Bank, wrote in a note following the report. “With both ‘headline’ and ‘core’ inflation rising 0.2% month-over-month, one could surmise that the post-pandemic inflationary impulse has faded.”
“Said another way, in 2019, the average monthly increase in inflation was 0.2%, and that’s what we’ve experienced in the past two months in 2023. The Fed, therefore, might feel as if they’ve ‘stuck the landing’ and can pause as planned and not raise interest rates in September,” he added.
Still, other inflation watchers expect at least one more rate hike before the end of the year.
“Shelter costs remained strong and showed no signs of easing while energy prices are slated to put pressure on headline inflation going forward,” Raymond James’ Chief Economist Eugenio Aleman wrote. “Thus, this better inflation reading does not change our view that the Federal Reserve is going to increase the federal funds rate at least once more before the end of this year.”
“In order for this to change, there would need to be a strong decoupling between headline inflation and core inflation but for that, we need a big slowdown in shelter costs, which we have been expecting for several months and has still failed to show up,” he said.