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US Inflation Accelerates in July, Complicating Fed’s Path

Karl Schamotta August 13, 2019

3-month average core price growth hits 2.8% annualized

Odds on autumn rate cuts fall

Inflation-adjusted wages rise 1.2%

Consumer price growth leapt to a six-month high in the United States in July, complicating the picture ahead of the Federal Reserve’s September meeting. The Labor Department’s headline inflation index increased 0.3%, up 1.8% over the year prior, while its core measure – with food and energy prices removed – also rose 0.3%, up 2.2% from last July.

Most consumer product categories showed growth, with shelter costs rising 0.3%, medical care up 0.5%, and apparel up 0.4%. Used vehicle prices leapt 0.9% while new ones fell by 0.2%. Energy prices rose 1.3%, with a 2.5% rise in gasoline costs powering the increase.

These pressures are expected to strengthen as the latest round of trade tariffs – which apply to a far broader range of consumer prices – takes effect in September.

Food costs were flat, suggesting that China’s effort to cut purchases of agricultural products is weighing on prices.

A separate report showed a slight deceleration in real average hourly earnings, which rose 1.3% from last year as higher inflation took its toll.

With inflation making up the second half of its mandate, these numbers may help strengthen internal opposition to the Fed’s “insurance” cuts – raising the likelihood of two or more dissents when policymakers meet next.

Markets – which had positioned for a 0.2% core print – are selling US Treasuries, putting lift under long-term yields. Bets on a September rate cut remain largely intact, but odds on one or two more by the end of 2019 are falling – helping the dollar recover ground against its major counterparts.

But all indications suggest the central bank is firmly on an anticipatory footing, responding to storm clouds on the horizon, and not to the weather currently affecting the US economy. Market expectations for further easing may yet recover – perhaps as soon as the Jackson Hole Economic Symposium in Wyoming next week.

Karl Schamotta
Chief Market Strategist

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