US Inflation Stays Mild in July, Cooling Rate-Hike Expectations

US consumer prices rose only marginally in July, as lower gasoline costs for a second straight month helped keep overall inflation in check. The Labor Department reported a 0.1% increase in the Consumer Price Index (CPI) for the month, matching economist forecasts and following a 0.4% drop in June — the steepest monthly decline in six years.

Core inflation, which strips out volatile food and energy prices, also advanced a modest 0.2% in July. On an annual basis, core prices were up 2.5%, a slight cooling from June's 2.6% pace. The overall CPI rose 3.4% year-on-year, down from 3.5% the prior month.

A 0.1% rise in shelter costs accounted for roughly two-thirds of the monthly gain, though that was tempered by a 3.3% plunge in hotel and motel prices — likely tied to the end of the FIFA World Cup. Owners' equivalent rent, however, rose 0.3%. Gasoline prices fell 2.9% after a much larger 9.7% decline in June. Food prices edged up just 0.1%, while apparel costs saw marginal gains. Prescription medication and lodging costs declined.

The benign inflation data has further reduced the odds of a Federal Reserve rate hike at its September 15-16 policy meeting. Financial markets now price in roughly a 40% chance of an increase, slightly lower than earlier in the day. The Fed last month left its benchmark rate in the 3.50%-3.75% range.

Economists note that a rate increase this year is still possible, as inflation remains above the central bank's 2% target. Policymakers will receive August's CPI and employment reports before the September meeting, and price pressures are expected to pick up as recent oil price gains filter through. Job growth is also anticipated to rebound as seasonal distortions fade.

Despite the cooler readings, the high cost of living continues to weigh on American households, as wages have not kept pace with price levels from a year ago. This economic strain remains a political concern, with inflation having been a central issue in recent election cycles.

The dollar slipped against a basket of currencies in early trading, while US Treasury yields fell following the data release. Some economists caution that while the US's position as a net oil exporter has cushioned the economy from energy price shocks, the eventual need to replenish petroleum inventories could keep oil prices elevated for some time.