US inflation increased for the first time in a year in July, rising to 3.2% from June’s 3%.
However, the figure was lower than the consensus 3.3% economists had predicted, while core CPI, which strips out food and energy prices, decelerated 10bps to 4.7%.
Industry commentators say the latest print strengthens the case for the Fed to stop hiking in September.
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Seema Shah, chief global strategist at Principal Asset Management said: “The case is building for the Fed to keep policy rates unchanged in September. Both headline and core inflation are waning and the internals of the CPI print suggest that further deceleration pressures should build over the coming months. Indeed, strong shelter inflation will not be with us forever and will eventually reinforce the disinflation narrative.
“Yet, while inflation is moving in the right direction, the still-elevated level suggests that the Fed is some distance from cutting rates. Indeed, disinflation is unlikely to be smooth and will require some additional economic pain before the 2% target comes sustainably into view.”
Nathaniel Casey, investment strategist at Evelyn Partners, said the data should be “encouraging” for the Fed.
He said: “Despite the annualised headline CPI rate reaccelerating slightly in July due to unfavourable base effects, the gentle 0.2% monthly acceleration for both core and headline CPI should soothe markets and the Fed.
“There is still one more inflation and job report to come before the next FOMC meeting on the 20th of September, so while committee members are unlikely to make their next decision from this CPI print alone, it is yet another step in the right direction. Evidence of softening wage growth in August’s jobs report would likely be the final catalyst needed to signal the end of the tightening cycle.”
Gurpreet Gill, global fixed income macro strategist at Goldman Sachs Asset Management, added: “Overall, the underlying details of the July US inflation data are consistent with ongoing progress on disinflation. Although core services inflation trended higher on the month, other component-level data are evolving in line with our expectations. In particular, rents and used car prices softened, alongside clothing and airfares.
“The Fed has emphasised that its September meeting decision will hinge on the totality of data accumulated between now and then. The latest inflation data reinforces our view that July likely marked the peak in the Fed’s hiking cycle.
“However, we will be closely monitoring the evolution of core Personal Consumption Expenditures inflation and labour market rebalancing to determine whether the disinflation trend is durable.”
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