The rapid pace of inflation eased in July for the first time in months, but the slowdown in price gains is likely not enough for the Federal Reserve to take its foot off the brakes as it tries to cool the U.S. economy and tame rising costs.
The Labor Department reported on Wednesday that the consumer price index, a broad measure of the price for everyday goods including gasoline, groceries and rents, rose 8.5% in July from a year ago, below the 9.1% year-over-year surge recorded in June. Prices were unchanged in the one-month period from June.
The so-called core measure – which strips out food and energy – climbed 0.2% in July and 5.9% from the previous year, a marked slowdown from June.
While the moderation is likely a welcome respite for the Fed as it tries to wrestle inflation under control, consumer prices still remain at a painful, multi-decade high. On top of that, the Labor Department reported last week that employers unexpectedly added 528,000 jobs in July – nearly double the estimate from economists – suggesting the economy is still red-hot.
"This data will not alter the path of monetary policy out of the Federal Reserve," said Joe Brusuelas, RSM chief economist. "We expect a 75 basis point hike at the September meeting due to the hot labor market and the broadening out of inflation into the housing sector that is now a large part of the policy challenge."
Fed policymakers have signaled in recent days that they remain inclined to approve another mega-sized interest rate hike – either 50 or 75 basis points – when they meet toward the end of September. There will be another round of inflation and jobs data before the meeting on Sept. 20-21.
"I still think 50 basis points is the case, but I am open to 75 should the data evolve differently," San Francisco Fed President Mary Daly told Bloomberg TV on Thursday. She added that while the July figures are "significant… they're not victory."
"It really behooves us to stay data dependent and not call it," she added.
Traders are split over how big the Fed may go in September, with 55% pricing in a chance of a 50 basis point increase and 45% putting their money on a 75 basis point hike in the fall, according to the CME Group's FedWatch tool, which tracks trading.
Policymakers approved the second straight 75 basis-point hike in July and hinted in their post-meeting statement that additional increases are likely in the coming months as they remain "strongly committed to returning inflation to its 2% objective."
Chairman Jerome Powell said during his post-meeting press conference that another 75 basis-point hike could be appropriate in the future, but that it ultimately hinges on upcoming economic data.
"We're going to watch the data and the evolving outlook very carefully and factor in everything and make a decision in September about what to do," Powell said. "I'm not really going to provide any specific guidance about what that might be. But I mentioned that we might do another unusually large rate increase, but that's not a decision that we've made at all."