U.S. inflation softer than forecast in July

Ann Santiago
August 12, 2017

It was up 1.4% in June from a year earlier and has dropped for four consecutive months on an annual basis, from 2.2% in February. It is expected to delay its next rate hike until December while it monitors inflation.

Consumer prices posted a slight gain in July, with higher costs for medical care and clothing offsetting declines for hotel stays and consumer cellphone plans.

While picking up more quickly than personal consumption expenditure (PCE) - the Federal Reserve's preferred measure of inflation - the consumer price index (CPI) remained stubbornly below the Fed's target rate of 2%.

Food prices rose by 0.2% in July after coming in unchanged in June, while energy prices edged down by 0.1% after tumbling by 1.6% in the previous month. Just when the Fed though it had won the inflation battle, victory was snatched from its hand's within a matter of months.

"Indeed, food prices have risen for seven of the last eight months - with last month being the exception, showing a 0.2% month-on-month fall". Core prices, which exclude food and energy to better capture inflation's trend, were also up 0.1% on the month and 1.7% on the year. That lifted the year-on-year CPI increase to 1.7 per cent in July, from 1.6 per cent in June.

Federal Reserve Chair Janet Yellen told Congress last month she believes tight labor markets will start producing higher wage gains and increased inflation.

U.S. inflation softer than forecast in July

"A softer reading would mean fresh trouble as it would remind investors that inflation remains well below Fed's target and suggest that a December rate hike might not be that likely after all", he said.

The Fed's favoured measure of inflation lags even further behind, with the PCE measure now registering an annual rate of 1.4% in June.

"The last thing the markets want here is the tension between (the) US and North Korea". They are now down 13.3 percent over the past 12 months, the biggest 12-month decline in cell phone charges in 16 years.

The data indicate inflationary pressure at the various stages of the production process is relatively stable, helping explain why Fed policy makers plan to raise interest rates only gradually.

The modest gain in consumer prices could worry Fed officials, who have largely viewed the retreat in inflation as temporary. With unemployment at 4.3% in July, it appears the Fed has closed in on one half of its mandate.

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