US July CPI shows modest cooling but remains elevated

The U.S. consumer price index (CPI) increased by 0.1% in July and was 3.4% higher than a year earlier, according to the Bureau of Labor Statistics. The monthly gain matched economists' forecasts and followed a 0.4% decline in June, while the annual rate edged down from 3.5% in May.

Core CPI, which excludes gasoline and food, rose 0.2% month-over-month and 2.5% year-over-year, a modest uptick after flat growth in June. Energy prices fell 1.5% in July but remain 14.7% above last year’s level; gasoline dropped 2.9% month-over-month yet is still 24.6% higher than a year ago. Food prices edged up 0.1% and are 3% higher than a year earlier.

Housing costs contributed about two-thirds of the overall monthly increase, with the shelter index up 0.1% and 3.2% year-over-year. Transportation services rose 0.3% and airline fares were 2.2% higher than the previous month, reflecting a 25.5% increase over the past year.

"In-line inflation will keep the ‘no need to hike rates’ narrative that took hold after last week's jobs report intact," said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.

"With another round of inflation data due before the September FOMC meeting, it remains all to play for, but today's in-line report was a good start," added Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management.

Market expectations for Federal Reserve policy shifted after the report, with the CME FedWatch tool indicating a 61.9% probability that rates will stay in the 3.5%-3.75% range at the upcoming meeting, up from 51.6% the day before. The odds of a 25-basis-point hike fell to 38.1%.

Equity indices responded positively; the S&P 500 gained about 0.3% in early trading, the Nasdaq rose roughly 0.6%, while the Dow Jones Industrial Average was largely unchanged.