Dow Futures soar as US inflation data shows price rise in July was lesser than the market feared

The US markets rallied as the inflation data for July was lighter than what was expected. The Dow Jones Futures increased by over 400 points, whereas the Nasdaq surged over 2 percent.

The inflation data reflected the lower energy prices, which could take some pressure off the Federal Reserve to continue aggressively hiking interest rates.

The consumer price index increased 8.5 percent from a year earlier, cooling from the 9.1 percent June advance that was the largest in four decades, the Labour Department data showed Wednesday. Prices were unchanged from the prior month. A decline in gasoline offset increases in food and shelter costs.

So-called core CPI, which strips out the more volatile food and energy components, rose 0.3 percent from June and 5.9 percent from a year ago.

The data may give the Fed some breathing room, and the cooling in gas prices, as well as used cars, offers respite to consumers. But annual inflation remains high at more than 8 percent and food costs continue to rise, providing little relief for President Joe Biden and the Democrats ahead of midterm elections.

While a drop in gasoline prices is good news for Americans, their cost of living is still painfully high, forcing many to load up on credit cards and drain savings. After data last week showed still-robust labor demand and firmer wage growth, a further deceleration in inflation could take some of the urgency off the Fed to extend outsize interest-rate hikes.

Treasury yields slid across the curve while S&P 500 futures extended gains and the dollar plunged. Traders reduced the odds of the US central bank boosting rates by three-quarter percentage point next month.

Gasoline prices fell 7.7 percent in July, the most since April 2020, after rising 11.2 percent a month earlier. Utility prices fell 3.6 percent from June, the most since May 2009.

Food costs, however, climbed 10.9 percent from a year ago, the most since 1979. Used car prices decreased.

Even though inflation decelerated, Fed officials have said they want to see months of evidence that prices are cooling, especially in the core gauge. They’ll have another round of monthly CPI and jobs reports before their next policy meeting on Sept. 20-21.

Shelter costs — which are the biggest services’ component and make up about a third of the overall CPI index — rose 0.5 percent from June and 5.7 percent from last year, the most since 1991. That reflected a 0.7 percent jump in rent of primary of residence. Hotels, meanwhile, fell 3.2 percent.

Elsewhere in leisure, airfares dropped 7.8 percent from the prior month, the most in nearly a year.

While prices are showing signs of moderating, there are several factors that risk keeping inflation high. Housing costs are a big one, as well as unexpected supply shocks. And wages are still climbing at a historically fast pace, concerning some economists of a so-called wage-price spiral.

However, those gains aren’t keeping up with inflation. A separate report showed real average hourly earnings fell 3 percent in July from a year earlier, dropping every month since April 2021. The impact of inflation on wages has started to dent spending, with the pace of personal consumption growth decelerating between the first and second quarters.

That said, consumer expectations for US inflation declined sharply in the latest survey by the New York Fed, suggesting Americans have some confidence that prices will come off the boil in the next one to five years.