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US inflation softer than expected; dollar bounces back after brief drop

US inflation showed little sign of accelerating in July as the annual rate of CPI rose by 0.2%, in-line with estimates and only slightly higher than June’s 0.1%. The month-on-month change was below estimates as prices rose by just 0.1%, the slowest rate since April, against forecasts of a 0.2% rise.

The core CPI rate, which excludes food and energy items, held steady at 1.8%, which was within estimates. But the month-on-month rate came in at 0.1%, below forecasts of 0.2%.

The biggest monthly decline in prices came from lower fuel costs, but electricity, gas and used vehicles prices also saw sizeable falls over the month. Transport costs were lower too, mainly due to a 5.6% fall in airline fares.

Gasoline prices contributed the most to monthly prices increases, while shelter costs such as hotels and residential rents rose at the highest rate since 2007. Food prices rose by 0.2% in July, slower than the 0.3% rate in June. Big increases in the price of eggs and beef over the last 12 months offset falls in the price of fruits and vegetables, and other dairy products.

Today’s CPI data is unlikely to make the Fed more confident that inflation is returning closer to its 2% target, but it has already indicated that it does not need to wait for inflation to rise higher before deciding to raise interest rates. With the unemployment rate already near full employment levels and the housing market strengthening significantly in recent months, the Fed could decide that the conditions are right for inflation to rise to its 2% target in the medium term.

Next month’s jobs report and inflation figures will be even more important as they will be the final set before the FOMC meeting on September 16-17. Unless there is a significant worsening of the employment and inflation outlook, which could come from recent events like the growing uncertainty on the health of China’s and other emerging market economies, the Fed is likely to stay on track to raise rates in September or possibly in December.

The dollar briefly tumbled against major currencies after the data as the muted figures took markets by surprise, but with the price of core items showing signs of ticking up, the greenback quickly bounced back to near the day’s open. It touched a low of 124.09 against the yen before surging to 124.46, but later eased to 124.35. The euro jumped to 1.1074 but fell back to 1.1041 in late European session. The pound was steadier but off highs to trade at 1.5659.

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