U.S. Core Inflation Hits Six-Month High in Broad-Based Gain

(Bloomberg) --

A key measure of U.S. consumer prices unexpectedly accelerated in July in a broad-based advance, signaling inflation may be firming as the Federal Reserve debates whether to lower interest rates further.

The core consumer price index, which excludes food and energy, rose 0.3% from the prior month, and 2.2% from a year earlier, according to a Labor Department report Tuesday. Both gains exceeded the median estimate of economists, while the broader CPI advanced 0.3% on the month and 1.8% annually.

Faster inflation may strengthen the hand of those policy makers who are reluctant to keep lowering borrowing costs following last month’s quarter-point reduction, as employment and consumer spending remain solid. At the same time, the latest ratcheting-up of U.S.-China trade tensions and a deepening global economic slowdown are weighing on the outlook, with investors pricing in two to three more moves this year.

Following the report, traders trimmed slightly the amount of Fed easing they have priced in for this year while the 10-year Treasury yield climbed to its high for the day. Those moves were amplified later in the morning, and stocks surged, after the U.S. delayed tariffs on a range of consumer goods from China by more than three months, to Dec. 15.

Policy makers have struggled to lift inflation toward their 2% target, which is based on a separate Commerce Department index that tends to run slightly below the Labor Department’s CPI. President Donald Trump has repeatedly cited low inflation in his attacks on the Fed and calls for deeper interest-rate cuts, and he tweeted after the CPI data that the tariffs aren’t actually boosting prices.

“While a few details suggest that the pace overstates the trend, it is clear tariffs are beginning to drive goods prices higher,” Sarah House, a senior economist at Wells Fargo & Co., said in a note Tuesday.

The 2.2% annual gain in the core CPI followed 2.1% in June and marked the fastest increase since January. The index rose an annualized 2.8% over the past three months, the most since early 2018. The two-month gain of 0.6% was the most in more than a decade.

What Bloomberg’s Economists Say

“Firming core CPI in July is challenging the Fed’s view that a return to its 2% inflation target would take longer than previously projected.”
-- Yelena Shulyatyeva and Eliza Winger
Click here for the full note.

While the Fed officially targets inflation including all items, policy makers look to the core measures for a better sense of the underlying trend because food and energy prices tend to be volatile.

Many key measures within the Labor Department’s gauge advanced in July. Shelter costs, which make up about a third of total CPI, rose 0.3% for a second month, while medical care was up 0.5%, apparel advanced 0.4% and used cars and trucks rose 0.9%.

Prices for new vehicles fell 0.2%, the first decline since February.

Energy prices rose 1.3% from the prior month as gasoline prices increased 2.5%. A national gauge of retail gasoline prices was up on average during the month though it has declined since mid-July. Food costs were unchanged for a second month.

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• A separate Labor Department report Tuesday showed average hourly earnings, adjusted for price changes, rose 1.3% in July from a year earlier, following 1.5% in June, indicating higher inflation took a bigger bite out of wage gains.
• Economists surveyed by Bloomberg had forecast the core gauge would rise 0.2% from the prior month and 2.1% from a year earlier, with the broader index rising 0.3% on the month and accelerating to 1.7% on a yearly basis.

--With assistance from Kristy Scheuble, Benjamin Purvis and Vince Golle.

To contact the reporter on this story: Katia Dmitrieva in Washington at edmitrieva1@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Vince Golle

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