Consumer prices rose 0.2% in July in line with consensus expectations. Core CPI (excluding food and energy) also rose by 0.2%, the fastest gain since January.

From a year ago, headline inflation was unchanged at 2.9%, while the core rate edged up to 2.4% (from 2.3% in June), hitting its highest level since September 2008.

Energy prices fell 0.5% (month-on-month), declining for a second straight month. Food prices were up a modest 0.1%.

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Core goods prices rose for the first time in five months, up 0.1% (month-on-month) while core services accelerated to 0.3% (from 0.2%).

Key Implications

Inflation has yet to show major signs of acceleration, but July marked a step in this direction. With the gain in prices, the Fed’s preferred core PCE metric is likely to hit 2.0% on a year-on-year basis in the month.

We have learned to temper our expectations for inflation, but all of the pieces are in place for price growth to move higher. The labor market is tight, with more job openings than people to fill them, domestic demand is being buoyed by tax cuts and spending, and tariffs will soon raise the price of imported consumer goods.

With both inflation and employment at target, the economic data are supportive of the Fed’s expected path for interest rate increases, with two more likely before the year comes to a close. As we discussed in our recent Dollars and Sense, faster inflation could be key to pushing longer-term bond yields higher and preventing the yield curve from inverting as the Fed continues to push short-term rates higher.


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