Inflation Eases, but Crude Oil Surge Raises August Worries

The July Consumer Price Index (CPI) report has provided some mixed signals on inflation. The overall CPI rose by 0.1% in July, bringing the annual rate to 3.4%, while core readings increased by 0.2% and 2.5% respectively.

This moderation in inflation comes largely due to a decline in energy prices, which have dropped by 7% from their May peak. However, crude oil has seen a recent surge of 10%, posing upside risks for the August CPI reading unless tensions in the Middle East ease.

Shelter costs have been a key driver of inflation, but they have shown some signs of easing, with the shelter index rising just 0.1% over the past two months. This is largely due to sharp declines in 'lodging away from home' costs, which has posted drops in three out of the last four months.

Core inflation rates are now back at levels seen prior to the U.S. and Israel's attack on Iran in late February. Traders have taken this benign core number into account along with last Friday's weak nonfarm payrolls report for July, lowering the odds for a rate hike at the Fed's September meeting.

According to Dan North, senior economist at Allianz Trade North America, 'This makes life for the Fed a little bit easier because now there's less pressure for that hike that everybody was expecting. Inflation appears to be getting tamer.'