US July Inflation Meets Expectations, Markets Cut Hike Bets
A mild increase in US consumer prices for July has sharply reduced the likelihood of a Federal Reserve rate hike next month, prompting a rally in stock futures.
US consumer prices rose a seasonally adjusted 0.1% in July, matching consensus forecasts and suggesting the central bank can afford to wait before tightening monetary policy further. The core measure, which excludes volatile food and energy costs, climbed 0.2% for the month. Annual inflation held at 3.4% overall and 2.5% at the core level, remaining well above the Federal Reserve's 2% target.
Traders immediately priced out the urgency of a September move. The probability of a rate increase at the next Federal Open Market Committee meeting fell to 42%, according to the CME Group's FedWatch gauge. Just a week ago, markets had been leaning heavily toward a hike, but a recent net job loss in July combined with tame price data has shifted expectations toward October or December.
Equity futures rose on the release while Treasury yields retreated across the board. The market reaction reflects a growing confidence that the inflationary spike driven by geopolitical tensions in the Middle East is continuing to dissipate. Energy prices dropped 1.5% in July following a 5.7% decline in June, though the sector is still up 14.7% year-over-year due to surges earlier in the year.
Shelter costs, a persistent hurdle in the inflation fight, increased 0.1% and accounted for roughly two-thirds of the headline monthly gain. Elsewhere, prices for new vehicles rose 0.1%, used cars and trucks gained 0.4%, medical care climbed 0.4%, and airline fares accelerated by 2.2%.
While prices remain subject to global energy shocks, the data reinforces a recent shift in the rate outlook. "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 for Morgan Stanley Wealth Management.
The Fed will have another month of data to assess before its September gathering. "There will be another round of inflation data before the September FOMC meeting, so the storyline could still change," Zentner noted. "But unless those numbers tell a much different story, the Fed will likely still be in a position to leave rates unchanged next month."
