A benign inflation report has given the Federal Reserve some breathing room. Consumer prices rose less than expected in July, easing fears that the central bank would need to raise interest rates at its September meeting.
Prices cool, but stay above target
Headline inflation came in at 3.4 percent for the year ending in July, according to the Labor Department's consumer price index. Core inflation, which strips out food and energy, rose 2.5 percent from a year earlier. Both readings matched or beat economist forecasts.
Inflation has now run above the Fed's 2 percent target for more than five years. The central bank has kept its policy rate steady throughout 2026 while it waits for price growth to slow.
Markets adjust their bets
Traders responded by trimming their bets on a September hike. Futures markets now price about a 38 percent chance of a rate increase next month, down from higher odds before the report. Many investors still expect the Fed to raise rates before the end of the year.
'Without forward guidance, the September decision will likely remain a close call until the very end,' wrote Olu Sonola, head of U.S. economics at Fitch Ratings. 'It will not be a slam dunk: whether it is a hold or a hike, both hawks and doves will find enough in the data to make their case.'
A mixed picture for the Fed
The inflation data arrives alongside signs of a cooling labor market. Recent employment reports have been revised downward, and wage growth has slowed. That combination gives Fed officials room to hold rates steady when they meet in mid-September.
The next major data point is the personal consumption expenditures index, the Fed's preferred inflation gauge, due August 26. A string of benign inflation reports between now and September would ease pressure on the central bank to act.
Oil prices add another layer of risk. Brent crude has climbed toward $90 a barrel on tensions in the Strait of Hormuz, which could push energy costs higher in the coming months.