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U.S. inflation rate creeps back up, CPI shows, but probably not enough to worry the Fed

The numbers: U.S. consumer prices rose a mild 0.2% in July, but the rate of inflation rose for the first time in more than in a year in a sign it’s going to take a while to get the rise in the cost of living fully under control.

The yearly rate of inflation rose to 3.2% from to 3% in the prior month, the consumer price index showed. It was the first increase in13 months.

Still, a steady slowdown in inflation over the past year could keep the Federal Reserve on the sidelines when senior officials consider whether to raise interest rates again at their next meeting in September.

Inflation has eased considerably since hitting a 40-year high of 9.1% in the middle of 2022.

The so-called core rate of inflation, meanwhile, also rose 0.2% last month. The core rate omits volatile food and energy costs.

The increase in core inflation over the past year slowed a tick to 4.7% from 4.8%. That’s the lowest rate in almost two years.

The Fed doesn’t ignore food and energy prices, but the central bank views the core rate as a better predictor of inflation trends.

Even so, the core rate of inflation remains well above the Fed’s 2% goal.

Over the past year the central bank has been raising U.S. interest rapidly to try to slow the economy and dampen inflation. Yet it’s less likely after the July CPI report that the Fed will continue to do so at its next meeting in September. Financial markets put the odds close to zero.

Economists polled by the Wall Street Journal had forecast a 0.2% increase in the both the headline and core CPI.

Key details: More than 90% of the increase in consumer prices was tied to shelter — rent and housing prices. Rents rose 0.4% and they are up 8% in the past year.

Auto insurance also rose sharply for the second month in a row. Many American have seen big increases in their insurance bills this year.

The prices of most other goods and services were muted.

Food and gas prices both rose 0.2% last month, though consumers will soon foot higher fuel bills because of the surging cost of oil. That could boost inflation considerably in August.

Airfares sank 8% for the second month in a row. Used-vehicle prices, a big contributor to the runup in inflation, fell 1.3%. Medical-care costs also declined.

Big picture: Inflation has slowed sharply in the first half of 2023, but further falls this year are unlikely to come as easily.

Gasoline prices are on the rise again, for one thing. Rent and house prices are still going up. And labor costs are increasing more than 4% a year, making it harder for the Fed to achieve its inflation target.

The U.S. economy, for its part, is still expanding at a surprisingly robust pace. Strong consumer demand could keep prices elevated, especially for popular services such as hotel rentals, dining out and entertainment.

Looking ahead: “This report gives the Fed latitude to keep the federal funds rate unchanged at their September meeting,” said Philip Neuhart, director of market and economic research at First Citizens Bank Wealth.

Market reaction: The Dow Jones Industrial Average

and S&P 500

were set to open higher in Thursday trades on the hope that a cooler CPI would keep the Fed from raising rates again.

The yield on the 10-year Treasury note

rose a few ticks 4%.

This story originally appeared on Marketwatch

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