Key Highlights

  • Economists forecast the Consumer Price Index would rise 0.1% in July, with the annual rate easing to 3.4% from 3.5% in June
  • Gasoline prices averaged $4.064 a gallon in July, down from $4.184 in June and from $4.609 in May, according to Energy Information Administration data
  • Core PCE inflation, the Fed's preferred gauge, was forecast to rise 0.2% for the month and hold at a 3.3% annual rate, unchanged from June
  • Economists said Inflation risks remain tilted to the upside given no resolution to the US-Israeli war with Iran

Economists Expect Moderate July Inflation Reading

US consumer prices likely increased moderately in July, a reading that could further reduce financial market expectations for the Federal Reserve to raise interest rates this year. The report followed news of surprise Job losses the prior month, with economists noting that the country's position as a net oil exporter and drawdowns of petroleum inventories had helped cushion the economy from the oil price shock triggered by the Middle East conflict.

A finance and Economics professor said he did not expect any significant surprise when the numbers came out, adding that he did not see the Fed either raising or lowering rates unless both Unemployment and inflation data turned out badly. The Consumer Price Index was forecast to have rebounded 0.1% in July after falling 0.4% in June, the first monthly decline in six years, with the annual rate expected at 3.4%, down from 3.5% in June.

Falling Gasoline Prices Seen as Key Driver

The anticipated small monthly increase was expected to reflect a further decline in gasoline prices, which averaged $4.064 a gallon in July compared with $4.184 in June, according to Energy Information Administration data, having fallen from an average of $4.609 a gallon in May. Food prices were expected to increase marginally in line with recent trends, while goods prices, including household furniture and apparel, were expected to account for the moderate overall rise amid a fading pass-through from tariffs.

Outside the volatile energy and food components, core CPI was forecast to rise 0.2% in July after being unchanged in June, translating to a 2.5% annual increase. Core Inflation was expected to be lifted by rebounds in used car and truck prices as well as education and communication goods, along with anticipated increases in airfares and a mild pickup in rents.

Fed's Preferred Gauge May Tell a Different Story

Even with benign core CPI readings, economists cautioned the results were unlikely to be replicated in the core Personal Consumption Expenditures price measure, the gauge the Fed uses to track its 2% inflation target, leaving some economists expecting the Central Bank to still consider tightening policy in September. Core PCE inflation was forecast to rise 0.2% over the month after gaining 0.1% in June, translating to a 3.3% annual increase matching June's pace. An economist at Bank of America Securities said a report in line with expectations would strengthen the case for the Fed hiking in September.

Economists continued to view inflation risks as tilted to the upside given no resolution to the US-Israeli war with Iran. The high cost of living has weighed on views of the administration and could affect the Republican Party's prospects in November's midterm elections, which will determine control of Congress.