The US CPI rose 8.5 percent year-on-year in July, a slower annual increase from June as inflationary pressures eased on the back of lower gasoline prices.
CPI data released on Wednesday will raise hopes that the pace of price increases in the world’s largest economy has peaked and is slowing, which will bring comfort to both the Federal Reserve and the Biden administration.
According to the figures, there was no increase in CPI between June and July, compared with a monthly increase of 1.3 percent a month ago. On a yearly basis, CPI growth fell from a 9.1 percent rise in June.
Both numbers were improvements on economists’ expectations of a 0.2 percent monthly increase in CPI and an 8.7 percent annual increase – but average inflation is still close to a 40-year high.
The data is unlikely to represent a shift large enough to stop the Fed from pursuing more aggressive monetary tightening to dampen inflation. Fed Chairman Jay Powell said the Federal Reserve is looking for “convincing” evidence that inflation is moving towards its 2 percent target.
The core measure, the CPI — which hides more volatile food and energy prices and is most closely monitored by the Fed — also posted a smaller-than-expected monthly gain of 0.3 percent from June’s 0.7 percent. On an annual basis, however, it rose unchanged by 5.9 percent.
A possible sustained slowdown in inflation could mean that the central bank may not need to hike rates at a steep pace for a long period of time. This could make a soft landing that avoids a recession more likely. Earlier this week, the New York Fed announced that its consumer survey showed falling inflation expectations, which would also be a key factor in the policy-making process.
“With headline inflation still at 8.5 percent and core inflation at 5.9 percent, this is not yet the meaningful fall in inflation the Fed is aiming for. But it’s a start and we expect broader signs of easing price pressures over the next few months,” said Paul Ashworth, chief US economist at Capital Economics.
Traders were encouraging on Wednesday’s data, pricing in smaller rate hikes by the Fed in the coming months. The central bank is expected to hike interest rates to 3.4 percent by the end of the year, according to futures prices, up from 3.6 percent before the report was published. Bets that the Fed would hike rates by 0.75 percentage point at its September meeting also fell.
US stocks jumped in response, with the benchmark S&P 500 up 1.7 percent in early New York trade. The Nasdaq Composite, which includes technology stocks that are more sensitive to changes in interest rate expectations, rose 2.2 percent.
US Treasuries also rallied, with the yield on the 10-year Treasury note — an indicator of the cost of borrowing around the world — slipping 0.07 percentage points to 2.73 percent, according to Refinitiv data. The policy-sensitive two-year yield slipped 0.18 percentage points to 3.1 percent, reflecting a rise in the instrument’s price.
Within the CPI, the fall in gasoline prices was the driving factor behind the slowdown, along with a fall in air fares. But food and shelter prices continued to rise in roughly line with previous months, which will continue to weigh on many households’ finances.
“One of the issues with this number is that rent pressure continues,” said Tom di Galoma of Seaport Global Holdings, which could weigh on consumer spending. “I think the Fed wants to get this tightening cycle over as soon as possible, which means a 0.75 percentage point hike in September.”
The inflation data came after a strong jobs report last Friday that allayed fears of a near-term recession but suggested the Fed was struggling to cool the overheated economy.
It comes as President Joe Biden’s administration and Congressional Democrats celebrated the Senate passage of a $700 billion climate, tax and health bill that is a crucial pillar of the president’s economic agenda.
Although they have dubbed it an anti-inflation law, the law is expected to have no significant impact on prices in the short term. However, certain measures are intended to reduce costs in the medium and long term, including a provision allowing the government to negotiate prescription drug prices.
Additional reporting from Harriet Clarfelt in London