Consumer prices posted a slight gain in July, with higher costs for medical care and clothing offsetting declines for hotel stays and consumer cellphone plans.

The U.S. Labor Department said Friday that its consumer price index edged up 0.1% last month after no gain in June and a 0.1% fall in May. Core inflation, which excludes volatile energy and food changes, was also up a slight 0.1% in July.

Both overall inflation and core inflation have risen an identical 1.7% over the past 12 months. That shows that inflation pressures remain well under control. In fact, a separate inflation gauge favoured by the Federal Reserve has been slowing this year, raising concerns that inflation is falling farther from the Fed’s 2% goal.

“The story remained the same for the American economy in July: a healthy job market, but no new momentum in inflation pressures,” says Leslie Preston, senior economist at TD Economics in a data release.

Preston notes “one-off price drops in specific categories” led to lack of momentum but adds that “doesn’t explain the entire weakening seen in measures of inflation that strip out such volatility (trimmed mean or median CPI). Inflation has weakened across many advanced economies, suggesting that a broader phenomenon – such as persistent economic slack globally – may be playing a role.” 

It’s Preston’s view that inflation pressures will keep building “through the remainder of the year, but the process is proving slower than expected,” adding risk to the pace of U.S. Federal Reserve hikes over the rest of this year and next year. 

Read: The central bank pivot: how far and fast rates could move

So far in 2017, the Fed has raised its benchmark interest rate in March and June, and has signalled it plans a third rate hike before year’s end. But private economists say the Fed may stand pat for the rest of 2017 unless inflation accelerates in coming months. The Fed’s preferred inflation gauge showed a 12-month price gain of 2.2% in February, but its latest reading has slowed to a gain of just 1.4%.

Fed Chair Janet Yellen has blamed the slowdown on temporary factors such as a price war in the cellular phone industry that has pushed monthly mobile phone charges down. But she has also indicated that if her view is proven wrong, she is ready to support a change in the Fed’s plans for rate hikes. The Fed meets again in September.

Analysts believe it will keep rates unchanged and may not hike again until December.

Avery Shenfeld of CIBC Capital Markets says in a research note, “Lately, core PCE hasn’t been tracking as much below core CPI as it had earlier, so we’re not necessarily miles below the 2% core PCE objective. But we’re going to need a few 0.2% monthly gains in core prices to stay on track for our projected Fed hike in December.” 

For July, the CPI report showed that monthly wireless phone charges dropped 0.3%. They are now down 13.3% over the past 12 months, the biggest 12-month decline in cellphone charges in 16 years.

The costs of hotel and motel stays plunged a record 4.9% in July, the biggest one-month on records that go back to 1997.

Clothing costs, which had been falling, rose 0.3% in July. Medical costs showed a 0.3% increase in medical services and an even bigger 1% jump in medical products such as drugs.

Energy costs dipped a slight 0.1% in July with the cost of gasoline unchanged. Food costs were up a modest 0.2%.


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