Inflation in the U.S. in June held no surprises. What interest rate decision will the Fed make?
Inflation in the U.S. Has Slowed / Photo: Elena Shishkina / Shutterstock
The Consumer Price Index (CPI) in the U.S. rose 3.4% year-over-year in July—following a 3.5% increase in June, according to the U.S. Bureau of Labor Statistics. On a month-over-month basis, prices rose 0.1%.
Core Consumer Price Index (Core CPI), which excludes volatile food and energy prices, rose 0.2% for the month after remaining flat in June and 2.5% year-over-year after 2.6% the previous month.
The statistics were exactly in line with the FactSet consensus forecast cited by Morningstar.
How did the market react?
Futures on the major U.S. stock indices rose following the release of inflation data. S&P 500 futures rose 0.4%, Dow Jones futures rose 0.3%, while Nasdaq 100 futures rose 0.8%.
The yield on 10-year U.S. Treasury bonds fell by 0.03 percentage points to 4.65%.
The probability that the U.S. Federal Reserve will leave the federal funds rate unchanged (in the 3.5–3.75% range) at its September 16 meeting is now estimated at 57%, although it was 50% prior to the release of the statistics, according to the FedWatch tool. The probability of a quarter-point rate hike (to the 3.75–4% range) is 43%; a rate cut is not being considered.
What does that mean?
Monthly inflation data are not cause for concern on their own: they are generally in line with the Fed’s targets, according to Bloomberg. The agency believes that the August data will be key—not only for inflation but also for the labor market.
"Slowly but surely, the path toward disinflation continues with a third consecutive encouraging core CPI reading... All upcoming Fed meetings will need to factor in the possibility of a surprise, but we continue to believe that the Fed will be able to walk the tightrope and avoid a rate hike, given the slow and gradual move toward the inflation target, the cooling of the consumer sector, and a more uncertain employment outlook,” said Christopher Hodge, Natixis’s chief U.S. economist, as quoted by Bloomberg.
CIBC Capital Markets economist Helen Lao believes the Fed will leave the rate unchanged at its September meeting. Sima Xi, a strategist at Principal Asset Management, does not expect any changes to the rate until the end of the year, but warns that the threat of tighter monetary policy has not disappeared: “Unless the August price data also shows an easing of price pressures, a rate hike in September remains a clear risk,” she says.
The July inflation data was released at a time when, due to a mixed labor market report, experts expect the Fed to pay particularly close attention to the July and August inflation figures, Morningstar notes. In July, the U.S. unexpectedly saw a decline in jobs, prompting traders to lower their expectations for rate hikes, according to Bloomberg.
Overall, “inflation remains more persistent and stubborn,” Vanguard economist Adam Schickling said in a Morningstar report ahead of the release of the July data. However, he believes that prices are moving in a “positive direction, gradually approaching the [Fed’s] 2% target.”
“Right now, the situation really revolves around inflation, not the labor market. It’s an unusual situation where the economy is expanding, yet the core PCE (Personal Consumption Expenditures price index. — Oninvest) is outpacing all other metrics,” Bloomberg quoted Kelsey Berro, a portfolio manager at JPMorgan Asset Management, as saying.
"The market is telling the Fed that it has inflation problems, but the regulator's current view is that recent data is soft enough to warrant not raising rates," — noted Bilal Hafez, founder and head of market strategy at Macro Hive.
This article was AI-translated and verified by a human editor
