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Investing.com - Headline U.S. consumer price growth in the U.S. was slower than anticipated on an annualized basis in July, possibly bolstering the case for the Federal Reserve to cut interest rates at its next policy gathering in September.
The Bureau of Labor Statistics’ consumer price index, a closely-monitored gauge of inflation, rose by 2.7% in the twelve months to July. The pace matched that logged in June and was slower than economists’ predictions of 2.8%.
On a month-on-month basis, the CPI reading edged up by 0.2%, in-line with estimates and cooler than 0.3% in June.
Stripping out volatile items like food and fuel, so-called "core" CPI increased by 3.1% year-over-year, compared to 2.9% in the previous month and projections of 3.0%. Month-on-month, the underlying metric ticked up to 0.3% from 0.2% as expected.
Economists have been flagging concerns that the core CPI figure could see more upward pressure as goods exposed to elevated U.S. tariffs become more expensive to import, and firms increasingly pass on those costs to American consumers.
In a note, analysts at Vital Knowledge argued that while the levies are pushing some categories higher, "they aren’t triggering a broad spike in prices."
"[A]t least not yet – keep in mind tariffs are only just now getting pushed throughout the economy as companies slowly deplete pre-tariff inventory and adjust prices," the analysts wrote in a note.
Fed rate implications
Heading into the release of the data on Tuesday, analysts had been predicting that any indication of tepid or easing inflation could help clear the path for a 25 basis point rate reduction next month. Bets that the central bank will lower borrowing costs from their current level of 4.25% to 4.5% stood at just over 90% in the wake of the CPI figure, up from roughly 86% a day ago, according to CME’s FedWatch Tool.
Underpinning these expectations was a soft jobs report for July, which also came with sharp downward revisions to employment additions in June and May.
Following the nonfarm payrolls release, several Fed policymakers have hinted at a greater willingness to back rate cuts, rather than stick to their multi-month "wait-and-see" approach to future policy decisions. Chief among their worries were fears that President Donald Trump’s aggressive trade agenda could drive up inflation and weigh on wider economic activity.
But with the labor market possibly beginning to cool and inflation muted, investors are wagering that the Fed may have more room to slash rates -- a move that, in theory, could spur businesses to spend and invest in hiring. U.S. stock futures climbed after the report was unveiled.
"Given several [rate-setting Federal Open Market Committee] participants are now more worried about the labor market outlook, this probably won’t be enough to prevent the Fed from easing policy sooner than we previously expected, but it does support our view that markets are overestimating the degree of loosening to come over the next 18 months," said Stephen Brown, Deputy Chief North American Economist at Capital Economics, in a statement.
A reduction in September would likely be welcomed by Trump, who has repeatedly criticized the Fed -- and Chair Jerome Powell in particular -- over its cautious approach to rate drawdowns. Powell has been steadfast in his support of this stance, drawing Trump’s ire.
The CPI report is also one of the first major publications from the BLS since Trump dismissed its commissioner, Erika McEntarfer, after the July jobs data was unveiled. The president claimed, without providing evidence, that the employment figures had been doctored to hurt him politically.
McEntarfer’s firing raised fresh fears over the reliability of government data, and led some observers to anticipate a potential surge in demand for private-label numbers.
On Monday, Trump said he had nominated E.J. Antoni, chief economist at the conservative think tank Heritage Foundation, as McEntarfer’s replacement. The Senate must still confirm the appointment.