US inflation rises by 2.9% in July driven by housing costs

Inflation in the United States continued its expected trajectory in July, with the consumer price index (CPI) increasing by 0.2% for the month, pushing the annual inflation rate to 2.9%, according to a recent report from the Labor Department.

This aligns with economists’ expectations, who had forecasted similar figures based on a Dow Jones survey.

The core CPI, which excludes the volatile food and energy sectors, also rose by 0.2% in July, resulting in an annual rate of 3.2%.

This is the lowest core inflation figure recorded since April 2021. Despite this, inflation levels remain a concern for the Federal Reserve as it navigates interest rate policies.

Housing costs drive 90% of the CPI increase

A significant driver of the CPI increase in July was the 0.4% rise in shelter costs, which accounted for 90% of the overall inflation rise.

Food prices saw a modest increase of 0.2%, while energy prices remained flat for the month.

Within the food category, certain items like eggs saw a notable increase of 5.5%, while cereals and bakery items declined by 0.5%.

The Federal Reserve is likely to keep interest rate cuts on the table for its September meeting, given the easing inflation pressures.

However, the decision is complicated by persistent inflation in specific areas like housing and mixed signals from the labour market.

Futures markets anticipate potential rate cut

Current futures market pricing indicates an even chance of a quarter- or half-percentage point rate reduction at the Federal Reserve’s September meeting.

This would mark the first rate cut since the early stages of the Covid-19 pandemic, reflecting concerns over a slowing labour market and ongoing inflationary pressures.

While inflation appears to be easing, concerns about the labour market’s stability are likely to influence the Federal Reserve’s decision-making process.

The Fed has been cautious about committing to a specific timetable for rate cuts, balancing inflation data with employment trends.

Market reaction and outlook

Following the release of the inflation report, stock market futures showed a mildly negative reaction, while Treasury yields experienced a slight increase.

The market’s response reflects the ongoing uncertainty surrounding the Federal Reserve’s next move on interest rates.

In a related development, the Labor Department reported a 0.1% increase in producer prices for July, leading to a 2.2% year-over-year rise.

This figure serves as a proxy for wholesale inflation and further indicates the complex inflationary landscape that the Federal Reserve must consider.

Inflation trends raise questions

As inflation trends downward, the focus shifts to how the Federal Reserve will manage interest rates in the coming months.

With inflation nearing the central bank’s 2% target, the potential for rate cuts is increasing, though the decision will be influenced by a variety of economic factors, including housing costs and labour market conditions.