According to the latest report by the Labor Department, the United States inflation continued to follow its predicted trajectory. The consumer price index (CPI), which measures prices, increased 0.2% in July. This pushed the annual rate of inflation to 2.9%.
The Dow Jones survey had predicted similar numbers.
In July, the core CPI (excluding volatile sectors such as food and energy) also increased by 0.2%, giving a rate of annual 3.2%.
It is the lowest level of core inflation since April 2021. The Federal Reserve is still concerned about inflation as they navigate their interest rate policy.
The CPI is driven by housing costs to the tune of 90%
The 0.4% increase in housing costs was responsible for 90 percent of the inflation rate in July.
The food prices increased by 0.2% while the energy prices were flat.
In the food sector, some items, such as eggs, saw an increase of 5,5%. Cereals and baked goods, however, declined by 0,5%.
Given the ease in inflation, the Federal Reserve will likely keep the option of lowering interest rates on its agenda for the September meeting.
The decision can be complicated, however, by the persistent inflation of certain areas such as housing and the mixed signals coming from the labor market.
Futures market anticipate a possible rate cut
The current futures prices indicate a 50% chance that the Federal Reserve will reduce rates by a quarter or half percentage point at its September meeting.
The first cut in interest rates since the Covid-19 pandemic’s early stages, this would reflect concerns about a slowing labor market and continuing inflationary pressures.
Federal Reserve decisions are likely to be affected by concerns over the stability of the labor market, even though inflation seems to have eased.
Inflation data and employment trends have been balanced by the Fed when deciding on a timetable of rate reductions.
Reaction and market outlook
Stock market futures showed only a modestly negative response to the report on inflation, while Treasury yields saw a small increase.
Market reaction reflects ongoing uncertainty regarding the Federal Reserve’s next interest rate move.
The Labor Department also reported that producer prices rose by 0.1% in July. This led to an increase of 2.2% on a year-over-year basis.
This number is a proxy measure of wholesale inflation, and it also shows the complexity of the inflationary environment that the Federal Reserve has to consider.
Inflation trends raise questions
The Federal Reserve is now focusing on how it will set interest rates as inflation continues to decline.
The possibility of rate reductions is growing as inflation approaches the central bank’s target of 2%. However, this decision will also be affected by various economic factors such as housing costs and the labour market.
The post US Inflation Rises 2.9% in July Driven by Housing Costs may be updated as new information becomes available.
