US inflation rises less than expected

Inflation rose less than expected in July.

The consumer price index rose 0.1% month-over-month, and 0.1 excluding volatile food and energy costs, according to the Bureau of Labour Statistics.

Economists had estimated a 0.2% rise month-on-month, and by the same amount excluding volatile food and energy costs.

This was the most crucial data point of the week that came ahead of the Federal Reserve’s September meeting. Many market participants believe the FOMC could raise rates for the first time in a decade.

The Fed is in a ‘live mode’, taking all the data as they come to make its decision. Inflation is one of the most crucial.

Inflation has long run below the Fed’s 2% target. However, in its July statement, the Fed indicated that it is confident inflation will gradually rise towards its target in the medium term, as the labour market gets stronger.

In a morning note to clients ahead of the data, Societe Generale’s Kit Juckes wrote (emphasis added), “Long after this cycle is over, the stability of both core CPI and wage growth in the US, in both the post-2008 downturn and the subsequent recovery, will be a huge source of debate. For now though, there will be plenty of people to say that the lack of any upward pressure to inflation justifies keeping rates at current levels for longer (and I shall continue to disagree strongly).

The Fed’s July statement also noted that inflation would likely move towards the 2% target as the “effects of earlier declines in energy prices and import prices dissipate.” However, crude oil prices are tumbling again, and are about 30% down from the peak in June.

The energy index climbed 0.1%, as higher gas prices offset declines in other energy componenets. Fuel oil prices fell 3.9%, the most among CPI components.

Economists are watching for what effect lower oil prices may have on inflation, and on the Fed’s outlook.

More to come …

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