US consumer prices rose slightly in July, a reading that could weaken the case for the Federal Reserve to raise interest rates next month.
Data released Wednesday by the U.S. Bureau of Labor Statistics showed that the Consumer Price Index rose 0.1% last month, after falling 0.4% in June, the first decline in the index in six years.
On an annual basis during the 12 months ending in July, the Consumer Price Index rose by 3.4%, compared with an increase of 3.5% in June.
Excluding highly volatile food and energy components, the core consumer price index rose 0.2% in July, after remaining unchanged in June, while annual core inflation rose to 2.5% in the 12 months ending in July, compared with 2.6% in June.
The inflation reading is in line with expectations.
Economists polled by Reuters had expected the consumer price index to rise 0.1% in July, along with a 0.2% increase in core inflation on a monthly basis, which matched the actual data.
The Federal Reserve relies on personal consumption expenditures price indices to assess how close inflation is to its 2% target, and not on the consumer price index alone.
The inflation report came after data released last week showed the US economy unexpectedly lost jobs in July, increasing uncertainty about the strength of the labor market and the direction of monetary policy in the coming period.
Prior to the release of inflation data, financial markets were pricing in a roughly 46% probability of an interest rate hike during the Federal Reserve meeting scheduled for September 15 and 16, according to the CME Group's FedWatch tool.
The Federal Reserve faces new data before making a decision.
Policymakers still need to obtain August's inflation and employment data before the September meeting, meaning that today's reading alone will not determine the direction of the next interest rate decision.
Economists expect consumer price increases to accelerate in August, driven by the recent rise in oil prices, while job growth is likely to rebound as seasonal effects that distorted recent employment data fade.
Last month, the Federal Reserve kept its benchmark overnight interest rate in the range of 3.50% to 3.75%, despite divisions within the monetary policy committee over the appropriate path for interest rates.
Inflation data takes on added importance in light of a weak labor market, as the Fed tries to balance the risks of inflation remaining above its target with the risks of an economic slowdown and further job losses.
Oil threatens to reignite inflationary pressures
The United States’ position as a net exporter of oil, along with the drawdown of petroleum product inventories, helped to limit the negative effects of the oil price shock caused by the conflict in the Middle East on the US economy.
But some economists believe this situation cannot continue indefinitely, noting that the United States and other countries will at some point need to rebuild oil stockpiles, which could keep crude prices at high levels.
Continued geopolitical tensions make it more difficult to predict the path of inflation, especially if any new developments in the Middle East disrupt energy supplies or raise oil prices even further.
In an interview published late Monday, US President Donald Trump accused Iran of employing a “deceptive” approach in negotiations and discussed some of the options available to him in the war, including allowing economic pressure to increase on Tehran or launching a powerful strike against it.
Inflation is easing, but the cost of living remains high.
Although the slowdown in inflation in July may lead to a further decline in expectations of interest rate hikes, this reading may not provide much relief to consumers, especially as wages continue to lag behind the pace of rising prices.
The high cost of living continues to negatively affect many Americans' view of the Trump administration, which could impact the Republican Party's chances in the November midterm elections, which will determine which party controls the US Congress for the next two years.
Trump won the 2024 presidential election largely thanks to his pledge to reduce inflation and ease the cost of living for Americans.
Therefore, the July data gives the Federal Reserve some room to hold off on raising interest rates, but it does not close the door on any move in September, especially since the inflation and employment data for August, along with developments in oil prices, will remain crucial factors in determining the central bank’s next move.
Markets react to US inflation data: Gold and stocks rise, dollar falls
Financial markets moved strongly following the release of US inflation data for July, which showed the Consumer Price Index rising 0.1% month-on-month and 3.4% year-on-year, while core inflation rose 0.2% month-on-month and reached 2.5% year-on-year. The readings were in line with market expectations.
Initial market movements reflected investors' welcome of the data, as it did not contain any upward inflationary surprises that might prompt the Federal Reserve to tighten monetary policy further, especially after the recent weak labor market data.
Gold jumps by more than 1%
Gold jumped by about 1.00% in spot trading, rising by $44.30 to about $4,485.40 an ounce, according to data displayed on the trading screen, indicating that the precious metal benefited from the easing of pressure on expectations of raising interest rates.
In contrast, silver rose by 1.31%, an increase of 57.11 cents, to reach approximately 4,425.26 cents per ounce, according to screen data.
In the currency market, the dollar index fell by about 0.14% to 99.68.
The positive atmosphere was also reflected in US index futures, with Dow Jones futures rising 0.24%, or 130 points, to around 54,010 points.
S&P 500 futures rose 0.39%, or 30 points, to around 7,777.50, while Nasdaq 100 futures made the strongest gains among the major indices, rising 0.89%, or 265 points, to around 29,891.
