While U.S. consumer prices were only slightly up in July, but economists don’t expect low inflation to deter the Federal Reserve from raising interest rates later this year.
The Consumer Price Index in July rose 0.1% from the previous month and 0.2% from a year ago, the Labor Department said Wednesday, reflecting the biggest drop in airline fares since 1995.
The food index rose 0.2% from June, the energy index rose 0.1%, and the index for all items less food and energy rose 0.1%, mainly due to a 0.4% advance in the shelter index — the largest increase since February 2007.
Economists polled by Reuters had forecast the CPI rising 0.2% from June and gaining 0.2% from a year ago.
Signs of an improving economy, including a tightening labor market and firming housing sector, where prices are on the rise, should give the Fed confidence that inflation will gradually move toward its 2% target, Reuters said.
“Fed officials made clear that they do not need to see higher inflation before hiking,” RBS chief economist Michelle Girard said. “They just need to have reasonable confidence it will return to mandate.”
Most economists expect the Fed to raise its short-term interest rate next month for the first time in nearly a decade.
“But the pace of monetary tightening is likely to be gradual given the dampening effect on inflation of a strong dollar, renewed weakness in oil and other commodity prices, and China’s devaluation of the yuan, which should push down import prices,” Reuters said.
“The low inflation profile will certainly keep the Fed communicating a gradual glide path, but little in the July CPI report suggests that hikes should be delayed,” said Gennadiy Goldberg, an economist at TD Securities in New York.