Gas prices keep U.S. CPI in check

U.S. consumer prices were unchanged in July, as a big drop in gasoline and other energy prices kept inflation under control.

The Labor Department said Tuesday the flat reading for overall inflation followed a 0.2% gain in June. Energy prices fell by the largest amount in five months. Core inflation, which excludes volatile energy and food, edged up 0.1% in July, the smallest increase in four months.

The Federal Reserve has an inflation target of 2% annual increases. While core inflation has risen 2.2% over the past 12 months, overall inflation is still well below the Fed’s target, rising just 0.8% in the past 12 months. The Fed has left interest rates unchanged after a single rate hike last December.

At its last meeting, the Fed noted that risks to the economic outlook had diminished, opening the possibility of a rate hike later this year. Federal Reserve Chair Janet Yellen delivers a major policy speech at a conference in Jackson Hole, Wyoming, next week and economists are hoping she will provide clues about the Fed’s intentions.

Some analysts believe it could occur at the Fed’s next meeting in September—but many believe the central bank will wait until December before raising rates again, given modest economic growth and low inflation.

Sal Guatieri, senior economist at BMO Capital Markets, said the new report showing a slowdown in inflation pressures could make Fed officials “a little more uncertain” about how long it will take to reach the Fed’s 2% inflation target.

CIBC economists are toeing the same line. In a research note, the bank says, “There still doesn’t appear to be much pressure building in core prices, especially with wages only increasingly modestly. That should leave the Fed plenty of time to see a rebound in economic activity before raising the target range for the fed funds rate again.”

Read: Fed wants workers to get paid more

But, says CIBC, markets haven’t reacted much to today’s inflation news.

Inflation has been low at both the consumer and producer price levels. The government reported last week that producer prices fell by 0.4% in July, the biggest drop since last September.

In the report on consumer prices, energy costs dropped 1.6%, the first decline since a 6% slide in February. Gasoline costs were down 4.7% last month. Food costs were flat in July, following declines in June and May.

Outside of food and energy, new car prices posted a small 0.2% rise while housing costs and medical care also increased. Offsetting those gains were price declines for airline fares, used cars and trucks and recreation.

Read: Rethinking inflation-indexed pensions

Staff, with files from The Associated Press

The Associated Press is an American not-for-profit news agency headquartered in New York City.