Annual inflation rate slows to 2.9%, the lowest since 2021

Inflation rose as expected in July, driven by higher housing-related costs, according to a Labor Department report Wednesday that will likely keep an interest rate cut on the table in September.

The consumer price index, a broad measure of prices for goods and services, rose 0.2% on the month, bringing the 12-month inflation rate to 2.9%. Economists surveyed by Dow Jones had expected readings of 0.2% and 3%, respectively.

Excluding food and energy, core CPI rose 0.2% monthly and 3.2% annually, meeting expectations.

The annual rate is the lowest since March 2021, while the core rate is the lowest since April 2021, according to the Bureau of Labor Statistics report. Overall inflation was 3% in June.

A 0.4% rise in housing costs was responsible for 90% of the rise in inflation across all items. Food prices rose 0.2%, while energy prices remained stable.

Stock market futures were slightly negative after the report, while Treasury yields were mostly higher.

Although food inflation was moderate during the month, several categories saw significant increases, notably eggs, which rose 5.5%. Cereals and bakery products declined 0.5%, while dairy and related products fell 0.2%.

Inflation figures have been gradually returning to the central bank’s 2% target. A report on Tuesday from the Labor Department showed that producer prices, a proxy for wholesale inflation, rose just 0.1% in July and 2.2% year over year.

Federal Reserve officials have indicated a willingness to ease rates, though they have been careful not to commit to a specific timetable or speculate on the pace at which cuts might occur. Futures market prices currently point to a slightly higher likelihood of a quarter-percentage point reduction at the Fed’s next scheduled meeting on Sept. 17-18, and at least a full point in cuts by the end of 2024.

“Today’s CPI data removes any inflationary headwinds that might have prevented the Fed from starting the rate-cutting cycle in September,” said Seema Shah, chief global strategist at Principal Asset Management. “However, the number also suggests limited urgency for a 50 basis point cut.”

As inflation has moderated, growing concerns about a slowing labor market appeared to have increased the likelihood that the Fed will begin cutting rates for the first time since the early days of the Covid crisis.

“It’s coming down, but the problem areas are still problematic,” said Liz Ann Sonders, chief investment strategist at Charles Schwab, describing the CPI report. “We have to keep a close eye on both the inflation data and the employment data.”

The report contains several conflicting currents that, in fact, suggest that inflation is persistent in some areas.

Auto prices continued to decline, with new vehicles down 0.2% and used cars and trucks down 2.3% for the month and 10.9% from a year earlier. However, auto insurance costs rose another 1.2% and were up 18.6% year-over-year.

In the housing component, which accounts for more than a third of the index, an item asking homeowners how much they could get in rent rose 0.4% and was up 5.3% annually, again defying Fed expectations for a decline in housing-related costs.

On the other hand, several categories showed signs of deflation in the month, including health care services (-0.3%), clothing (-0.4%) and basic raw material prices (-0.3%).