US inflation edges up to 3.2% in July

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US headline inflation in July increased slightly since June, strengthening the case for the Federal Reserve to hold interest rates steady at its next meeting in September. 

The Bureau of Labor Statistics on Thursday reported that the consumer price index (CPI) rose 0.2 per cent month on month, matching June’s increase. The annual rate climbed to 3.2 per cent in July from the previous month’s 3 per cent figure, which marked the slowest pace since March 2021.

The slight rise in the annual headline rate does not suggest a true acceleration in inflation, but instead reflects so-called base effects related to soft data in July 2022.

Core inflation, which strips out the volatile food and energy components of the calculation, increased 0.2 per cent during July, the same rate as the previous month. The annual figure was 4.7 per cent, a slower pace than June, and the lowest level since October 2021.

The monthly figures for both headline and core inflation were in line with expectations of analysts polled by Refinitiv, while the annual figures were slightly below forecasts.

Following the release of the data, traders in the futures market added to bets that the Fed would keep interest rates steady in September, putting the likelihood of a pause at 91 per cent.

“I’m encouraged by the data. This keeps the Fed on pause for September. The CPI, the jobs report last week and ECI data all suggest that the Fed can pause,” said David Kelly, chief global strategist at JPMorgan.

After hitting a peak rate of 9.1 per cent last summer, headline inflation figures have been moving closer to the Fed’s 2 per cent target. Core inflation, however, has remained stubbornly high, putting pressure on the US central bank to keep interest rates higher for longer. 

July’s report, however, may ease pressure on the Fed to raise rates further this year. While the figures are roughly in line with the prior month, June’s report marked a meaningful improvement in inflation.

In a year and a half, the Fed has raised interest rates from near zero to a 22-year high of 5.25 to 5.5 per cent. Fed chair Jay Powell said last month that the central bank would decide on further rate increases on a meeting-by-meeting basis.

Labour market data released last week also suggested that the Fed’s aggressive campaign to raise interest rates has cooled the US economy. US jobs growth was weaker than forecast in July and was revised lower for the prior two months. There was still some evidence of inflationary pressure in the report, however, with the unemployment rate dropping to 3.5 per cent.

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US government bonds held on to their early-morning gains following Thursday’s inflation reading, with the benchmark 10-year Treasury yield trading 0.02 percentage points lower at 3.99 per cent. The policy-sensitive two-year yield was 0.02 percentage points lower at 4.78 per cent. Bond prices rise as their yields fall.

Futures contracts tracking Wall Street’s S&P 500 share index were up 0.6 per cent, extending an earlier advance, while those tracking the tech-heavy Nasdaq 100 gauge added 0.9 per cent.

The dollar traded 0.3 per cent lower against a basket of six other currencies.