U.S. inflation runs cooler than forecast, easing pressure on Fed

U.S. inflation decelerated in July more than expected, reflecting lower energy prices, which may take some pressure off the Federal Reserve to continue aggressively hiking interest rates.

The consumer price index increased 8.5% from a year earlier, cooling from the 9.1% June advance that was the largest in four decades, Labor Department data showed Wednesday.

Prices were unchanged from the prior month. A decline in gasoline offset increases in food and shelter costs.

So-called core CPI, which strips out the more volatile food and energy components, rose 0.3% from June and 5.9% from a year ago.

The core and overall measures came in below forecast.

The data may give the Fed some breathing room, and the cooling in gas prices, as well as used cars, offers respite to consumers.

But annual inflation remains high at more than 8% and food costs continue to rise, providing little relief for President Joe Biden and the Democrats ahead of midterm elections.

While a drop in gasoline prices is good news for Americans, their cost of living is still painfully high, forcing many to load up on credit cards and drain savings.

After data last week showed still-robust labor demand and firmer wage growth, a further deceleration in inflation could take some of the urgency off the Fed to extend outsize interest-rate hikes.

Treasury yields slid across the curve while the S&P 500 opened higher and the dollar plunged.

Traders now see a 50-basis-point rate increase next month as more likely, rather than 75.

“This is a necessary print for the Fed, but it’s not sufficient,” Michael Pond, head of inflation market strategy at Barclays said on Bloomberg TV. “We need to see a lot more.”

Fed officials have said they want to see months of evidence that prices are cooling, especially in the core gauge.

They’ll have another round of monthly CPI and jobs reports before their next policy meeting on Sept. 20-21.

Gasoline prices fell 7.7% in July, the most since April 2020, after rising 11.2% a month earlier. Utility prices fell 3.6% from June, the most since May 2009.

Food costs, however, climbed 10.9% from a year ago, the most since 1979. Used car prices decreased.

“With rents still pushing higher and elevated wages beginning to seep into services inflation, we expect this pause to be short-lived.

Core CPI could approach 7% in the coming months – despite our assumption of moderation in goods prices,” economists Anna Wong and Andrew Husby wrote in a note for Bloomberg Economics.

Shelter costs – which are the biggest services’ component and make up about a third of the overall CPI index – rose 0.5% from June and 5.7% from last year, the most since 1991.

That reflected a 0.7% jump in rent of primary of residence. Hotels, meanwhile, fell 3.2%.

Elsewhere in leisure, airfares dropped 7.8% from the prior month, the most in nearly a year.

While prices are showing signs of moderating, there are several factors that risk keeping inflation high.

Housing costs are a big one, as well as unexpected supply shocks.

And wages are still climbing at a historically fast pace, concerning some economists of a so-called wage-price spiral.

However, those gains aren’t keeping up with inflation. A separate report showed real average hourly earnings fell 3% in July from a year earlier, dropping every month since April 2021.