U.S. consumer prices moderate, though core inflation was unchanged in July

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The U.S. consumer price index (CPI) eased to 8.5% above year-ago in July, down from a 9.1% increase in June, as a decline in gasoline prices more than offset rises in food and other components. Despite the drop in gasoline prices during July, they were still 44.0% above year-ago, while the energy index was up 32.9%. The food index increased 1.1% in July – the seventh consecutive monthly increase of 0.9% or more – and jumped 10.9% over the past year, the largest 12-month increase since the period ending May 1979.

Core CPI, which excludes volatile food and energy prices, increased 5.9% versus last year, unchanged from June.

Traders slashed bets the Federal Reserve will deliver a third straight 75-basis-point interest rate increase in September following the bigger-than-expected slowdown in consumer inflation. Fed funds futures traders are now pricing in only a 38% chance the U.S. central bank will hike rates by 75 basis points when it meets in September, compared to 68% earlier. A 50-basis-point increase is now seen as a 62% probability.

Meanwhile, Bank of America thinks the U.S. yield curve could invert more deeply than at any time since the 1980s because of the Fed’s efforts to cool inflation. The two-year Treasury rate currently exceeds the 10-year by more than 40 basis points. The inversion, around the deepest since 2000, is viewed as a sign of a looming recession.

 

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