Fed Likely to Want Further Evidence of Inflation Slowdown
A slowdown in inflation last month, following recent indications of a robust labor market, complicates the Federal Reserve’s decision on how much to raise interest rates next month.
Data on inflation and economic activity are likely to guide whether central bank officials lift their benchmark federal-funds rate by a half-percentage point or three-quarters of a point at their Sept. 20-21 policy meeting. They have said they want to see evidence that price pressures and economic growth are cooling before they moderate their pace of rate increases.
Wednesday’s inflation report keeps the Fed’s door open to a half-point rate increase in September if subsequent data confirm price pressures are easing. But a 0.75-point rise remains possible after recent reports of accelerating growth in jobs and wages point to significant income gains that could sustain stronger spending and higher prices.
Declines in prices of energy, airfares, and used cars last month offered the first sign of inflation relief since the spring after broad price gains in May and June alarmed central-bank officials.
The Labor Department said Wednesday its consumer-price index was flat in July from June and rose 8.5% from a year earlier, slower than the 9.1% annual increase in June.
Core prices, which exclude volatile food and energy categories, increased 0.3% from June, much cooler than their 0.7% rise in June from May. The core CPI rose 5.9% in July from a year earlier, the same annual pace as in June.
The Fed raised rates by 0.75 percentage point at its July meeting, following a similar increase in June, which was the largest since 1994.
At a July 27 news conference, Fed Chairman
Jerome Powell
said another 0.75-point rate rise could be on the table at the September meeting but would “depend on the data we get between now and then.”
He has said the central bank needs to see convincing evidence that monthly inflation figures are declining before dialing back interest-rate increases to more-traditional quarter-point increments, especially after officials felt burned by a slowdown in price readings last summer that proved temporary. They will see one more monthly CPI report before their September meeting.
Inflation diminished last summer “and then turned right around and went back up,” Mr. Powell said at a June news conference. “So I think we’re going to be careful about declaring victory.”
Minneapolis Fed President
Neel Kashkari
said Wednesday he still anticipated that the central bank would need to raise its benchmark rate by another 1.5 percentage points this year and to around 4.4% next year. “This is just the first hint that maybe inflation is starting to move in the right direction, but it doesn’t change my path,” he said at a panel hosted by the Aspen Economic Strategy Group in Colorado.
Some Fed officials have suggested the central bank might lift rates by a half-percentage point in September, and financial-market participants have run with the idea that the central bank would soon moderate its rate increases. That depends on a slowdown in economic activity, especially hiring. Two labor market reports since the Fed’s July 26-27 meeting offered no such signal.
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“We’ve tightened monetary policy quite a lot, very quickly,” Chicago Fed President
Charles Evans
said Wednesday during remarks in Des Moines, Iowa. He said he expected the central bank to raise rates for the rest of this year and into 2023 to ensure inflation returns over time to the Fed’s 2% target.
Mr. Evans told reporters last week that he anticipated that the central bank would raise rates by a half-percentage point in September before slowing to quarter-point increases in November and December. He thought the Fed would need to raise rates by another half point early next year.
Employers added 528,000 jobs in July, and the unemployment rate fell to 3.5% from 3.6% during the previous four months, the Labor Department said last week. Wage growth was stronger than economists anticipated in July and was also revised higher in June.
A separate Labor Department report on employee compensation released July 29 that is widely watched inside the Fed showed brisk growth in wages and other labor costs.
On Wednesday, Mr. Evans said he didn’t think last week’s hiring figures indicated that inflationary pressures would require the central bank to raise rates more aggressively.
The U.S. economy shrank for a second quarter in a row during the April-to-June period, the Commerce Department reported last month, as the housing market slowed under rising interest rates and high inflation took steam out of business and consumer spending.
Last week’s hiring reading “puts into even sharper relief the difference between the labor market signal and the [gross domestic product] signal,” said St. Louis Fed President
James Bullard
in an interview Monday. Business owners and other executives are still scrambling for workers, he said. “We’ve got a long ways to go on the labor market,” Mr. Bullard said.
Mr. Bullard said that while Fed officials have been expecting inflation to diminish, “We’re going to need tangible evidence and widespread evidence of disinflation occurring before we can be really confident.”
Mr. Bullard has said he supports raising rates by a cumulative 1.5 percentage points at the Fed’s three remaining meetings this year, and he said he continued to favor the central bank’s approach of “front-loading” rate increases—approving larger rises at the start of the process rather than spreading smaller increases out over a longer period. Another 0.75-point increase in September “would certainly be on the table,” he said, but then added, “The good news is I don’t have to make that decision today.”
Write to Nick Timiraos at nick.timiraos@wsj.com
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