The Consumer Price Index, a main gauge of inflation, rose 1.4 percent year on year in July, down 0.1 percentage points from June's and has remained below 2 percent for six consecutive months, the National Bureau of Statistics said yesterday. Categories showing gains included apparel, medical care and transportation services, and owners equivalent rent.
Despite market skepticism, PNC Financial chief economist Gus Faucher insisted that "the next rate hike would likely come at the end of 2017, allowing time for inflation to pick up".
Food prices rose by 0.2 percent in July after coming in unchanged in June, while energy prices edged down by 0.1 percent after tumbling by 1.6 percent in the previous month.
The reading was slightly lower than market consensus forecast for 1.5 percent.
The Fed targets consumer price inflation as measured by the Personal Consumption Expenditures price index, but some of the factors are the same across all inflation measures.
Muted inflation in the July consumer price data is not something the Federal Reserve is going to be happy to see.
The outcome of this battle will set the course of interest rates and bond yields - and even the $US - over the remainder of the year.
Despite the weak inflation, the Fed is expected to start to wind down its 4.5-trillion-U.S. dollar balance sheet in September. Core CPI was predicted to advance by 0.2% as well, after 0.1% in June. The dollar index, a trade-weighted measure of the greenback against a basket of other currencies, was down 0.14% in early NY trade.
"The last thing the markets want here is the tension between USA and North Korea", said Stan Shipley, a strategist at Evercore ISI in NY. Analysts expected initial jobless claims to decline to 240,000. That is the longest such stretch since 1970, when the labor market was smaller. That's what markets are counting on, which adds to the upside risk to equity prices once the Fed concedes and winds back its interest-rate tightening intentions. That accounted for more than 80 percent of the decrease in the PPI. Services had increased for four straight months. This means that its index for vehicle prices may be flat or declining, even if the price of a new auto in 2017 is higher than the price in 2016.
According to Dudley, year-on-year inflation measures will be depressed for a while. If shelter costs are pulled out of the core index, it has been dropping at a 0.7 percent annual rate over the last three months compared with the prior three. Excluding food and energy prices, the index was up 1.5 percent. The intermediate goods index fell 0.1 percent, while the core intermediate goods index fell 0.3 percent.
Prices for all items less food and energy, the "core CPI", increased 0.1% in July, the fourth month in a row it increased that amount.
In June, the Fed raised the fed funds rate target by a quarter point for a second time this year to 1.00-1.25 percent.