US Inflation Cools to 3.4% in July

The Consumer Price Index (CPI) rose 3.4% year-over-year in July, line with the annual inflation economists expected and down from June's 3.5% increase, the Bureau of Labor Statistics reported Wednesday.

On a monthly basis, prices rose 0.1%, a rebound from June's 0.4% decline and matching the 0.1% economists expected.

Core CPI, which strips out food and energy, rose by 0.2% on the month, in line with forecasts.

The annual core inflation rate eased from 2.6% to 2.5%, again matching expectations.

The print lands four days after the July jobs report showed payrolls contracting by 23,000 against expectations of a roughly 80,000 gain.

Odds of a September interest-rate increase by the Federal Reserve, as priced in by the rate futures market, stood at 45% ahead of the release.

Where Did Prices Rise And Fall Last Month? Shelter was the biggest contributor to monthly inflation.

The index rose 0.1%, accounting for roughly two-thirds of the overall 0.1% increase.

Food prices also rose 0.1%.

But the details were mixed.

Grocery prices fell 0.1%, helped by a 0.7% decline in the index for meat, poultry, fish and eggs.

Restaurant prices moved in the opposite direction.

Food away from home rose 0.3%, with limited-service meals up 0.4%.

Energy provided the biggest relief.

The energy index fell 1.5% in July, while gasoline prices dropped 2.9%.

That decline matters because energy remains much more expensive than a year ago.

The energy index was still up 14.7% over the past 12 months, with gasoline prices up 24.6%.

Services were less cooperative.

Core prices rose 0.2% in July after being unchanged in June.

Airline fares jumped 2.2%, while medical care rose 0.4% and communication increased 0.6%.

Shelter remains the bigger issue, however.

It was still up 3.2% from a year earlier, keeping pressure on the broader services inflation picture.

There were some signs of easing underneath the surface.

Motor vehicle insurance fell 0.3%, prescription drugs dropped 0.8% and lodging away from home declined 2.8%.

The result is an inflation report that gives the Federal Reserve some room, but not necessarily a clear green light.

Market Reaction: Stocks Rise, Yields Fall Markets initially treated the report as a modest positive for risk assets.

The S&P 500 futures were up 0.1% after the release, while Nasdaq 100 futures gained 0.2%.

Dow futures rose 0.1% and Russell 2000 futures added 0.2%.

The bond market delivered a clearer signal.

The two-year Treasury yield, which is particularly sensitive to expectations for Federal Reserve policy, fell to around 4.18% after the data, down by about 2 basis points.

The dollar also weakened.

The U.S.

Dollar Index — as tracked by the Invesco DB US Dollar Index Bullish Fund (NYSE: UUP ) — fell 0.12%, while gold rose 0.30% to around $4,427 an ounce.

The move in interest-rate expectations was particularly notable.

Before the CPI release, markets had priced a 43% probability of a rate hike at the Federal Reserve's September meeting.

The probability of leaving rates unchanged stood at 57%.