The Consumer Price Index, which measures the level of inflation, was released for the month of July and it showed that inflation has cooled and came in slightly below expectations. Headline CPI rose 0.1% for the month, while annual inflation eased from 3.5% to 3.4%. Core CPI, which excludes food and energy, increased 0.2%, bringing its annual rate down from 2.6% to 2.5%—its lowest level since March 2021. A 2.9% decline in average gasoline prices helped restrain headline inflation, while recent core inflation readings suggest an annualized three-month pace of 1.64%, below the Federal Reserve’s 2% target.

Shelter inflation, a major component of core CPI, rose only 0.1%, indicating that official data may finally be reflecting softer real-time rental prices. However, the report benefited from a 2.75% decline in lodging costs, which may not continue; without that drop, core CPI could have been closer to 0.3%. Combined with weaker employment data, the cooler inflation report could prompt Fed officials to adopt a less aggressive stance. Following the release, the market-implied probability of a September rate hike reportedly fell from 50% to 38%.

Overall, the report points to easing inflation pressures and strengthens the case for the Federal Reserve to take a more cautious approach to future rate hikes.

Source : MBS Highway