US annual consumer inflation slowed to a four-month low in July, likely allowing the Federal Reserve to stay on hold for the rest of the year.
The consumer prices index rose 3.4% last month from a year earlier, decelerating from 3.5% rise in June and marking the slowest pace of growth since March, Bureau of Labor Statistics data showed Wednesday. The annual print matched the average forecast in a Bloomberg-compiled survey.
Core inflation, which excludes volatile food and energy items, eased to 2.5%, also as Wall Street expected, from June's 2.6%.
On a month-on-month basis, consumer prices rose 0.1% in July following a 0.4% drop the month prior. Core prices rose to 0.2% after holding steady in June. Both readings were in line with market projections.
"Despite the rebound in monthly measures, underlying inflation trends continue to move in the right direction," Thomas Feltmate, senior economist at TD Economics, said in a report. "At 3.4%, headline CPI has put further distance from its four-year high reached in May, while the annual change on core inflation fell back to its pre-Iran conflict rate of growth."
The annual increase in energy prices eased to nearly 15% from 16% in June. On a monthly basis, energy costs fell 1.5% following a 5.7% drop.
"Both the headline and core CPI in July were benign enough to reinforce our baseline forecast for a prolonged pause by the (Fed) over the remainder of the year," Bernard Yaros, lead US economist at Oxford Economics, said in a report e-mailed to. "Market expectations for a September rate hike have also downshifted on the back of the July CPI."
The probability of the Fed keeping its benchmark interest rate unchanged in September increased to 62% on Wednesday from 52% on Tuesday, according to the CME FedWatch tool. The odds that the US central bank will hike by 25 basis points fell to 38% from 48%.
Last month, the central bank's 12-member Federal Open Market Committee maintained the policy rate at 3.50% to 3.75% for the fifth consecutive time. However, three regional Fed presidents preferred to raise rates by a quarter percentage point.
Last week's official data showed an unexpected drop in US employment in July.
"One more jobs and CPI report - plus (Fed) Chair (Kevin) Warsh's Jackson Hole remarks on Aug. 28 - will be key in steering the Fed's next move," TD's Feltmate said. "But for now, it appears policymakers are likely to remain on the sidelines."
