The rapid pace of inflation eased in July for the first time in months, but the slowdown in price increases is unlikely to be enough for the Federal Reserve to take its foot off the brakes as it tries to cool the US economy and tame rising costs.
The Labor Department reported Wednesday that the consumer price index, a broad measure of the price of groceries including gasoline, groceries and rent, rose 8.5% in July from a year ago, below the 9.1[ads1]% year-over-year increase recorded in June. Prices were unchanged in the one-month period from June.
The so-called core measure – which removes food and energy – rose 0.2% in July and 5.9% from the previous year, a marked decrease from June.
While the moderation is likely a welcome respite for the Fed as it tries to wrestle inflation under control, consumer prices remain at a painful multi-decade high. On top of that, the Labor Department reported last week that employers unexpectedly added 528,000 jobs in July — nearly double the estimate by economists — suggesting the economy remains red-hot.
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“This data will not change the path of monetary policy out of the Federal Reserve,” said Joe Brusuelas, RSM chief economist. “We expect a 75 basis point increase at the September meeting due to the hot labor market and the extension of inflation to the housing sector which is now a big part of the policy challenge.”
Fed policymakers have signaled in recent days that they remain inclined to approve another mega-rate hike — either 50 or 75 basis points — when they meet in late September. There will be a new round of inflation and job data before the meeting on 20-21. September.
“I still think 50 basis points is the case, but I’m open to 75 should the data develop differently,” San Francisco Fed President Mary Daly told Bloomberg TV on Thursday. She added that while the numbers for July are “significant, they are not a victory.”
“It really claims us to be data dependent and not call it,” she added.
Traders are split on how big the Fed could go in September, with 55% pricing in a chance of a 50 basis point hike and 45% putting their money on a 75 basis point hike this fall, according to CME Group’s FedWatch tool. which tracks trade.
Policymakers approved the second straight increase of 75 basis points in July and indicated in their post-meeting statement that further increases are likely in the coming months as they remain “strongly committed to returning inflation to the 2% target.”
Chairman Jerome Powell said during the post-meeting press conference that another 75 basis point increase may be appropriate in the future, but that it ultimately depends on upcoming economic data.
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“We’re going to watch the data and the developing outlook very closely and take everything into account and make a decision in September about what we’re going to do,” Powell said. “I’m not really going to give any specific guidance on what that might be. But I did mention that we might do another unusually large rate hike, but that’s not a decision we’ve made at all.”