U.S. Consumer Prices Rebound But Inflation Subsides

(Reuters) – U.S. consumer prices rebounded as expected in July, but the trend remained consistent with subsiding inflation and did not change expectations that the Federal Reserve will cut interest rates next month.

The consumer price index (CPI) increased 0.2% last month after falling 0.1% in June, the Labor Department said on Wednesday. In the 12 months through July, the CPI increased 2.9%, down from 3.0% in June.

Economists polled by Reuters had forecast a 0.2% CPI increase for the month and a 3.0% year-on-year rise. The government reported a mild increase in producer prices on Tuesday.

The odds of a rate cut at the Fed’s Sept. 17-18 policy meeting are nearly split between half a percentage point and 25 basis points. On Wednesday, futures moved slightly in favor of a 25 basis point cut, with odds at 60.5%, according to LSEG calculations.

MARKET REACTION:

STOCKS: U.S. stock index futures extended a slight gain to 0.07%, pointing to a steady open on Wall Street.
BONDS: The 10-year U.S. Treasury yield rose to 3.858% and the two-year yield rose to 3.977%.
FOREX: The dollar index pared early slippage to -0.068%, and the euro parred its early rise to +0.2%.

COMMENTS:

Tom Graff, CIO, Facet, Phoenix, Maryland

“CPI came in largely in-line with expectations. The monthly Core figure was 0.2%, exactly as expected. The increase for the month came mainly from shelter, implying that the Fed’s favored inflation measure may come in below the CPI. This supports the argument for a September rate cut.”

David Doyle, Head of Economics, Macquarie, Toronto

“The report provides reinforcement that the disinflation trend remains intact, suggesting that the upturn in inflation earlier this year was temporary. There’s nothing here that should prevent a September rate cut. We expect 25 basis points.”

Ilya Volkov, CEO, YouHodler, Lausanne

“The CPI slightly decreased, which is positive news for equity markets. This could lead the Fed to consider a 50 basis point rate cut next month.”

Gennadiy Goldberg, Head of U.S. Rates Strategy, TD Securities, New York

“Rent accelerating surprised the market. While the CPI came in on the weaker side, this checks the box for the Fed to proceed with a rate cut in September.”

Jack McIntyre, Portfolio Manager, Brandywine Global, Philadelphia

“CPI is important but is lower in priority compared to payrolls and retail sales regarding market impact. The Fed has room to cut rates, indicating inflation is moving in the right direction.”

Rusty Vanneman, CIO, Orion, Omaha, Nebraska

“Consumer price inflation met expectations, with the headline year-over-year CPI slightly better than anticipated. The strong chance of a September Fed rate cut remains.”

Gerrit Smit, Head of Global Equity Management, Stonehage Fleming Investment Management, London

“The July U.S. headline inflation of 2.9% is the first reading below 3.0% since March 2021, and lower than consensus expectations. This could lead the Fed to consider an early rate cut.”