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Consumer price index increases 0.2% in July

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CPI rises 2.9% year-on-year, smallest gain since 2021

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Core CPI advances 0.2%; up 3.2% year-on-year

By Lucia Mutikani

WASHINGTON, Aug 14 (Reuters) - U.S. consumer prices rose

moderately in July and the annual increase in inflation slowed

to below 3% for the first time since early 2021, further

strengthening expectations the Federal Reserve will cut interest

rates next month.

The report from the Labor Department on Wednesday added to a

mild increase in producer prices in July in suggesting that

inflation was firmly back on a downward trend. That should allow

the U.S. central bank to focus more on the labor market amid

growing concerns of a sharp slowdown.

"The relay race to Fed cuts is on," said Lindsay Rosner,

head of multi-sector fixed income at Goldman Sachs Asset

Management. "The Fed is on track to cut some amount in

September, and we've got two more legs of this race to go."

The consumer price index increased 0.2% last month after

falling 0.1% in June, the Labor Department's Bureau of Labor

Statistics said. The rise was in line with economists'

expectations. A 0.4% increase in shelter, which includes rents,

accounted for nearly 90% of the rose in the CPI. Shelter costs

increased 0.2% in June.

Food prices gained 0.2%, matching June's rise. Gasoline

prices were unchanged after falling for two straight months. In

the 12 months through July, the CPI increased 2.9%. That was the

first sub-3% reading and smallest gain since March 2021.

Consumer prices advanced 3.0% on a year-on-year basis in June.

Annual consumer price growth has moderated considerably from

a peak of 9.1% in June 2022 as higher borrowing costs cool

demand. While still elevated, inflation is moving towards the

Fed's 2% target.

The odds of a half-percentage-point rate cut at the Fed's

Sept. 17-18 policy meeting are around 59%, with the remainder of

bets on a quarter-percentage-point drop, according to CME

Group's FedWatch tool. The rate pricing mostly reflects the jump

in the unemployment rate to near a three-year high of 4.3% in

July.

Economists, however, argue the labor market would have to

deteriorate considerably for the central bank to deliver a

50-basis-point reduction in borrowing costs. The fourth straight

monthly increase in the jobless rate was mostly driven by an

immigration-induced rise in labor supply rather than layoffs.

The Fed has maintained its benchmark overnight interest rate

in the current 5.25%-5.50% range for more than a year, having

raised it by 525 basis points in 2022 and 2023.

Excluding the volatile food and energy components, the CPI

rose 0.2% in July after rising 0.1% in June. In the 12 months

through July, the core CPI advanced 3.2%.

That was the smallest year-on-year increase since April 2021

and followed a 3.3% gain in June.

"Unless the global economy experiences another shock, the

Fed will most likely cut rates by a quarter percent in

September," said Jeffrey Roach, chief economist at LPL

Financial. "The probability of the Fed cutting by a half percent

is still elevated since investors are still somewhat skittish

from recent events."