US CPI report: Inflation rises as per estimates as Fed rate hike bets ease for now

US consumer inflation rose modestly in July, matching economists' expectations and potentially reducing the urgency for the Federal Reserve to raise interest rates next month as policymakers weigh easing price pressures against a weakening labour market.

The Consumer Price Index increased 0.1% in July from the previous month, according to data released Wednesday by the Bureau of Labor Statistics.

Core CPI, which strips out volatile food and energy prices, rose 0.2%.

Both readings matched estimates.

On an annual basis, headline CPI increased 3.4%, while core inflation rose 2.5%.

The figures were also in line with forecasts, although both measures remained well above the Federal Reserve's 2% inflation target.

Energy prices provide relief

The latest figures suggest that some of the price pressures seen earlier in the year may be losing momentum.

The energy index fell 1.5% in July after declining 5.7% in June.

Gasoline prices were a major contributor, with the gasoline index falling 2.9% during the month.

Before seasonal adjustment, gasoline prices declined 2.1%.

Despite the recent monthly declines, energy prices remained substantially higher than a year earlier.

The energy index was up 14.7% over the past 12 months, while gasoline prices increased 24.6% over the same period.

Data from the US Energy Information Administration showed that average gasoline prices fell to $4.064 a gallon in July from $4.184 in June.

Prices had averaged $4.609 a gallon in May.

The combination of declining energy prices and another relatively subdued monthly core reading could give Fed policymakers additional time to assess whether inflation is genuinely moving towards the central bank's target.

Markets see limited policy shock

US stock futures ticked higher following the inflation report.

S&P 500 futures were up about 0.5%, while Dow Jones futures gained 0.25%. Nasdaq futures rose roughly 1%, reflecting stronger sentiment toward growth and technology stocks.

JPMorgan's trading desk had outlined several potential market reactions ahead of the release, with a core inflation reading between 0.2% and 0.25% seen as the most likely scenario.

Such a result was expected to lift the S&P 500 by between 0.25% and 0.75%.

Steve Ryder, senior fixed-income portfolio manager at Aviva Investors, said the report was unlikely to trigger an immediate policy shift.

"The report is likely to reassure policymakers that the sharp downside surprise seen in June was neither entirely noise nor the start of a much faster disinflation process," he said.

Ryder said the data should keep expectations of a September rate hike alive but would provide little urgency for the Fed to act immediately.

Jobs data remains key

The inflation report comes days after a weak US payrolls report showed the economy unexpectedly shed jobs in July, prompting investors to scale back expectations for near-term monetary tightening.

The Federal Reserve held rates steady at its July meeting, although three of its 12 policymakers voted for an increase.

Since then, markets have been caught between evidence of persistent inflation and signs that the labour market is losing momentum.

According to the CME's FedWatch gauge, traders see roughly a 50-50 chance of a rate increase at the Fed's September meeting.

October and December are increasingly viewed as more likely windows for additional tightening if inflation remains elevated.

Ryder said investors may now focus more heavily on the next inflation and labour market reports before drawing conclusions about the Fed's next move.

"Treasury yields and market pricing may see only a limited reaction, with investors continuing to debate whether inflation is converging towards target or stabilising at a pace that remains modestly above it," he said.

The latest CPI figures therefore leave the Fed with room to wait, keeping the policy outlook finely balanced as officials assess whether price growth is slowing enough to justify patience or remains too high to rule out another rate increase later this year.