The Fed last month left its benchmark overnight interest rate in the 3.50%-3.75% range. July's cooler inflation readings likely offer little comfort to consumers. Inflation-adjusted average hourly earnings fell 0.2% in July from a year ago. They have been either flat or declining since April.
The high cost of living has soured many Americans' views of President Donald Trump, and could weigh on the Republican party's chances in the November midterm elections that will determine control of the U.S. Congress for the next two years. Trump won the 2024 presidential election in large part because of his promise to lower inflation.
"A bit more challenging will be how the Fed explains this to a restive public," said Joseph Brusuelas, chief economist at RSM. "Investors will likely celebrate muted growth in pricing ... whereas consumers, especially middle class and down-market households will either increase credit demand or slow consumption in the second half of the year to make ends meet as their real disposable income declines."
Excluding the volatile food and energy components, the CPI gained 0.2% last month after being unchanged in June. The so-called core CPI was lifted by a 0.4% rebound in healthcare prices and 2.2% increase in airline fares. Prices for information technology commodities rebounded 1.4%, reflecting a 3.5% surge in computers, peripherals and smart home assistants. Apple AAPL.O raised iPad and MacBook prices in June.
There was a rebound in used cars and trucks. Apparel prices increased slightly as did household furnishings and supplies, suggesting the pass through from tariffs was ending. But overall core goods prices rose 0.2% after two straight monthly declines. Some economists said this pointed to higher distribution costs being passed on to consumers. The cost of services excluding rent of shelter increased 0.2%.
The United States' position as a net oil exporter and the drawing down of petroleum inventories had cushioned the hit on the economy from the oil price shock sparked by the Middle East conflict, but some economists said that could not persist indefinitely. They also added that the U.S. and other nations would at some point need to replenish petroleum inventories, which would keep oil prices elevated.
Economists expect the pace of consumer price increases to pick up in August, reflecting the recent increase in oil prices.
Job growth is also expected to rebound as seasonal distortions fade. Based on the CPI data, economists estimated that core PCE inflation rose 0.2% in July after edging up 0.1% in July. That would translate to a 3.3% year-on-year increase, matching June's rise.
"Our base case remains for the FOMC to hike in December," said Britney Jackson, a U.S. economist at BNP Paribas Securities. "Risks to our call are for an earlier move."
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