By Lucia Mutikani
WASHINGTON, Aug 12 (Reuters) - U.S. consumer prices barely increased in July as the cost of gasoline declined for a second straight month, while underlying inflation was benign, further reducing the odds of an interest rate hike from the Federal Reserve next month.
The small rebound in the monthly Consumer Price Index reported by the Labor Department on Wednesday, which was in line with economists' expectations, also reflected marginal gains in the prices of food and apparel as well
as decreases in the costs of hotels and motel rooms, and prescription medication.
The report followed on the heels of news last week of surprise job losses in July, and suggested limited pass through from the oil price shock sparked by the Middle East conflict. Still, economists said a rate increase this year remained on the table as inflation was running well above the U.S. central bank's 2% target. Fed officials will get August CPI and employment reports before their September meeting.
"While not definitive, the report should further ease the Fed's fears about an energy-driven inflation spiral," said Scott Anderson, chief U.S. economist at BMO Capital Markets. "The Fed will need to see more evidence in future inflation reports that core services inflation is truly moderating before they take their rate hike threat completely off the table."
The Consumer Price Index edged up 0.1% last month after dropping 0.4% in June, which was the first decline in six years, the Labor Department's Bureau of Labor Statistics said.
A 0.1% rise in the cost of shelter accounted for roughly two-thirds of the gain in the CPI. Shelter was restrained by a 3.3% plunge in prices for hotel and motel rooms, likely linked to the end of the FIFA World Cup tournament. That offset a 0.3% increase in owners' equivalent rent.
Gasoline prices fell 2.9% after decreasing 9.7% in June. Food prices inched up 0.1% after climbing 0.2% in June. Grocery store prices dipped 0.1% amid a 1.5% drop in the cost of pork, the largest decrease since November 2023. Ground beef prices fell 1.6%, the most since September 2020. Walmart slashed ground beef prices last month. Ground beef prices, however, increased 9.0% over the year. Lettuce prices plunged 16.4%, likely as an outbreak of cyclosporiasis undercut demand.
In the 12 months through July, the CPI advanced 3.4% after rising 3.5% in June. The Fed tracks the Personal Consumption Expenditures price indexes for its 2% inflation target.
Financial markets were pricing in a roughly 38% chance of a rate increase at the Fed's September 15-16 policy meeting, down from 48.4% on Tuesday, CME's FedWatch Tool showed. Stocks on Wall Street were trading higher. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.
INFLATION ADJUSTED WAGES FALL
The Fed last month left its benchmark overnight interest rate in the 3.50%-3.75% range. July's cooler inflation readings likely offer little comfort to consumers. Inflation-adjusted average hourly earnings fell 0.2% in July from a year ago. They have been either flat or declining since April.
The high cost of living has soured many Americans' views of President Donald Trump, and could weigh on the Republican party's chances in the November midterm elections that will determine control of the U.S. Congress for the next two years. Trump won the 2024 presidential election in large part because of his promise to lower inflation.
"A bit more challenging will be how the Fed explains this to a restive public," said Joseph Brusuelas, chief economist at RSM. "Investors will likely celebrate muted growth in pricing ... whereas consumers, especially middle class and down-market households will either increase credit demand or slow consumption in the second half of the year to make ends meet as their real disposable income declines."
Excluding the volatile food and energy components, the CPI gained 0.2% last month after being unchanged in June. The so-called core CPI was lifted by a 0.4% rebound in healthcare prices and 2.2% increase in airline fares. Prices for information technology commodities rebounded 1.4%, reflecting a 3.5% surge in computers, peripherals and smart home assistants. Apple raised iPad and MacBook prices in June.
There was a rebound in used cars and trucks. Apparel prices increased slightly as did household furnishings and supplies, suggesting the pass through from tariffs was ending. But overall core goods prices rose 0.2% after two straight monthly declines. Some economists said this pointed to higher distribution costs being passed on to consumers. The cost of services excluding rent of shelter increased 0.2%.
The United States' position as a net oil exporter and the drawing down of petroleum inventories had cushioned the hit on the economy from the oil price shock sparked by the Middle East conflict, but some economists said that could not persist indefinitely. They also added that the U.S. and other nations would at some point need to replenish petroleum inventories, which would keep oil prices elevated.
Economists expect the pace of consumer price increases to pick up in August, reflecting the recent increase in oil prices.
Job growth is also expected to rebound as seasonal distortions fade. Based on the CPI data, economists estimated that core PCE inflation rose 0.2% in July after edging up 0.1% in July. That would translate to a 3.3% year-on-year increase, matching June's rise.
"Our base case remains for the FOMC to hike in December," said Britney Jackson, a U.S. economist at BNP Paribas Securities. "Risks to our call are for an earlier move."
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
