US July CPI Slows to 3.4% as Inflation Matches Expectations; Fed Remains Divided on September Policy

TradingKey - Data released by the U.S. Bureau of Labor Statistics on Wednesday showed that the U.S. Consumer Price Index (CPI) rose 0.1% month-on-month in July, a noticeable rebound from a 0.4% decline in June; year-on-year, it rose 3.4%, down from 3.5% in June. Both figures were largely in line with market expectations, indicating that U.S. inflation continues to cool slowly, though the overall level remains significantly above the Federal Reserve's 2% long-term target.

Core CPI, which excludes food and energy, rose 0.2% month-on-month, compared with zero growth in June; the year-on-year growth rate slowed from 2.6% to 2.5%, also matching prior market forecasts. Specifically, shelter costs rose 0.1% in July, accounting for roughly two-thirds of the overall monthly CPI increase; prices for medical care services, airline fares, and used vehicles rose, while energy prices declined 1.5%, driven by a 2.9% drop in gasoline prices, continuing to weigh on headline inflation.

Overall, the data sent a relatively mild signal. On one hand, core CPI continued its year-on-year moderation, indicating that the re-acceleration of inflation previously feared by the market has not materialized for now. On the other hand, energy prices have still risen 14.7% over the past year, with gasoline prices up 24.6% year-on-year. Coupled with recent Middle East tensions pushing international oil prices higher again, U.S. inflation still faces the risk of an energy price rebound in the coming months.

For the Fed, the July CPI does not completely settle the debate over whether to hike rates again in September. The Fed had previously maintained the federal funds rate at 3.50% to 3.75%, with some officials remaining concerned about inflation stickiness, while recent weakening in the labor market increases the risks of continuing policy tightening.

Overall, July CPI met expectations and continued to ease, which is moderately bullish for U.S. stocks and risk assets, but not enough for the Fed to completely lower its guard. Going forward, the market will closely monitor August inflation, employment data, and oil price trends to gauge whether the Fed will remain on hold or restart rate hikes at its September meeting.