U.S. inflation data due Wednesday could shape Fed policy and political debate
Economists expect July consumer prices to rise 3.4% year-over-year, a slight decline from June, as the Federal Reserve and lawmakers watch for signs of cooling inflation.
The U.S. Labor Department is set to release its July consumer-price index on Wednesday, a report that will be closely scrutinized by Federal Reserve officials, congressional Republicans and consumers facing high grocery costs. A FactSet poll of economists predicts a 3.4% year-over-year increase, down from 3.5% in June and below the 4.2% peak recorded in May. On a monthly basis, prices are expected to have risen 0.1% after a June dip driven by lower gasoline costs. Core inflation, which excludes food and energy, may have eased to 2.5% from 2.6% in June, with a 0.2% month-over-month gain.
Gasoline prices fell after a cease-fire in the U.S.–Iran conflict, helping to temper recent inflation readings, but they rose again in late July, averaging $4.04 per gallon, 16 cents higher than the previous month, according to AAA. Persistent price pressures remain in services such as health care, restaurant meals and auto repair, which have been increasing at more than 3% annually and are less responsive to fuel or technology-related cost changes.
“You’ve got all these things that are just not the way the economy used to behave,” said Diane Swonk, chief economist at KPMG.
Retailers have responded in varied ways; Walmart has reduced some food prices, while others, such as Sherwin-Williams, announced an 8% price hike effective Sept. 1 to offset higher raw-material costs. CEO Heidi Petz told analysts the company’s strong supplier relationships allowed it to delay the increase, adding that higher oil-related cost pressures are expected to continue throughout the year.
The report arrives as the Federal Reserve remains split on whether to raise its benchmark rate, which was left unchanged at about 3.6% after a 9-3 vote in its last meeting. Chair Kevin Warsh said at a July 29 news conference that if inflation stays elevated, “interest rates could well be part of that solution,” but he stopped short of committing to a specific action. Long-term Treasury yields rose after his comments, reflecting market concerns about future inflation and policy direction.
A recent government report showed a decline in employment in July, a potential signal of economic weakness that could influence the Fed’s stance, as higher rates risk further slowing hiring. Investors now price the odds of a rate hike at the September meeting at roughly 50-50, according to CME FedWatch.