US inflation accelerates; Fed rate cut still expected

WASHINGTON        -    US consumer prices increased broadly in July, but the signs of an acceleration in inflation will likely do little to change market expectations that the Federal Reserve will cut interest rates again next month amid worsening trade tensions.

The report from the Labor Department on Tuesday could however, reduce the probability that the US central bank will cut rates by half a percentage point at its Sept. 17-18 policy meeting.  Financial markets have fully priced in a 25-basis-point cut following a recent escalation in the bruising trade war between the United States and China, which sparked a stock market sell-off and caused an inversion of the US Treasury yield curve, heightening the risk of a recession.  Fears about the impact of the trade tensions on the US economic expansion, the longest in history, prompted the Fed to cut its short-term lending rate by 25 basis points last month for the first time since 2008.

“The recent pickup in inflation won’t deter the Federal Reserve from cutting interest rates in September as the downside risks to the outlook from trade have become more threatening,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.  The consumer price index increased 0.3% last month, lifted by gains in the cost of energy products and a range of other goods, the government said. The CPI had edged up 0.1% for two straight months. In the 12 months through July, the CPI increased 1.8% after advancing 1.6% in June.  Economists polled by Reuters had forecast the CPI would accelerate 0.3% in July and rise 1.7% on a year-on-year basis.

Excluding the volatile food and energy components, the CPI gained 0.3% after rising by the same margin in June. The so-called core CPI was boosted by increases in prices for apparel, airline tickets, healthcare and household furnishings.  In the 12 months through July, the core CPI climbed 2.2%, the biggest gain in six months, after rising 2.1% in June.

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