US July CPI seen rising moderately, Fed rate outlook in focus

US consumer prices likely increased modestly in July, a reading that could further temper financial market expectations for the Federal Reserve to raise interest rates this year, even as inflation remains above the central bank’s target, Reuters reported.

The Labor Department’s Consumer Price Index report, due on Wednesday, follows data showing unexpected job losses last month. Economists said the United States’ position as a net oil exporter and a drawdown in petroleum inventories have helped cushion the economy from the oil-price shock triggered by the conflict in the Middle East.

However, inflation risks remain tilted to the upside as uncertainty persists over the conflict involving the United States, Israel and Iran. Reuters reported that U.S. President Donald Trump has indicated that Washington is considering different approaches toward Tehran, including intensifying economic pressure or taking stronger military action.

CPI Expected to Rebound

The CPI is expected to have increased 0.1% in July after falling 0.4% in June, which was its first monthly decline in six years, according to a Reuters survey of economists.

On an annual basis, consumer prices are expected to have risen 3.4% in July, easing slightly from a 3.5% increase in June.

The modest monthly increase would come despite another decline in gasoline prices. Data from the Energy Information Administration showed that gasoline averaged $4.064 a gallon in July, down from $4.184 in June and $4.609 in May.

Food prices were expected to rise marginally, broadly maintaining their recent trend. Economists also anticipated price increases for goods such as household furniture and apparel as the impact of tariffs continues to work its way through the economy.

Core Inflation Remains Above Target

Excluding volatile food and energy components, the CPI was forecast to rise 0.2% in July after remaining unchanged in June. That would put annual core CPI inflation at 2.5%.

The Federal Reserve focuses on the Personal Consumption Expenditures price index for its 2% inflation target. A softer CPI reading could reduce expectations for tighter monetary policy, but inflation would still remain above the Fed’s goal.

The elevated cost of living also continues to weigh on consumers, particularly as wage growth has struggled to keep pace with price increases. Persistent inflation could also have political implications ahead of the November midterm elections.

Core Inflation Components in Focus

Economists expected core inflation to be supported by a rebound in prices for used cars and trucks, education and communication goods, as well as higher airfares.

Rents were expected to post a modest increase, while economists remained divided over whether hotel and motel prices would continue to decline.

Even if the core CPI delivers a relatively benign reading, economists cautioned that it may not necessarily translate into equally soft inflation in the core PCE measure. Differences in the weighting of components mean the two measures can produce different readings.

Fed Rate Path Still Uncertain

Reuters reported that economists expected core PCE inflation to rise 0.2% in July after increasing 0.1% in June. That would leave the annual rate at 3.3%, matching June’s increase.

As a result, a moderate CPI report alone may not eliminate expectations for the Fed to tighten monetary policy later in the year. The central bank is balancing persistent inflation pressures against signs of weakness in the labor market.

The July inflation data will therefore be closely watched for clues about the Fed’s next policy moves, with investors assessing whether price pressures are easing sufficiently to reduce the need for further rate increases or whether inflation remains stubborn enough to keep tighter policy on the table.