The US Bureau of Labor Statistics reported on Wednesday that the core Consumer Price Index (CPI), which excludes volatile food and energy categories, rose by 0.2% month-over-month. On an annual basis, core CPI increased by 2.5%, matching the slowest pace since March 2021. Overall, the headline CPI for July rose 0.1% from the previous month and 3.4% from a year ago.

This latest report indicates that the energy price shock stemming from the Iran conflict continued to fade in July. The data could provide the Federal Reserve with more room to weigh inflation pressures against the recent slowdown in hiring as it considers whether to raise interest rates at its September 15-16 meeting. Policymakers will still see additional employment and inflation reports before the September decision. Investors are also closely watching for a speech from Federal Reserve Chair Kevin Warsh, expected later this month at the central bank's annual Jackson Hole symposium.

Oscar Munoz, head of US economic research at TD Securities, commented, "This is good news for Fed officials who want to be patient. For those hoping to see progress on inflation and signs it continues to cool, this is already the second consecutive report of this nature." US stocks rose at the open, and Treasury yields fell as investors scaled back bets on a September rate hike.

Energy and gasoline prices declined for the second consecutive month. While US gasoline prices climbed back above $4 per gallon in July after the US-Iran ceasefire deal collapsed and hostilities resumed, the monthly average was still lower than in June. Grocery prices fell for the first time since March, partly due to a record drop in lettuce prices during a cyclospora outbreak. The price of uncooked ground beef fell 1.6%, its largest decline since 2020.

Housing costs edged up 0.1%, restrained by a 3.3% decline in hotel and motel prices. The data showed that services prices, excluding energy and rent, rose modestly by 0.2% after a decline in the prior month. Prices rose in service categories such as healthcare and airline fares. For goods, excluding food and energy, US prices rebounded after two consecutive months of decline. Computer software and accessories saw a record 21.2% year-over-year price increase, while prices for computers, peripherals, and smart home assistants posted their largest gain in over four years. Economists are monitoring the impact of price hikes on popular consumer tech products announced in June, including Apple's Mac and iPad. A shortage of memory chips, driven by the global race to build data centers, has contributed to these price increases.

Economic research suggests that "the July CPI report was mild enough to lower the probability of a September rate hike but not enough to rule it out entirely. Core inflation matching a five-year low from February, combined with the drop in July employment, makes it hard to find a compelling reason for an urgent rate hike," according to analysts Anna Wong and Troy Durie.

Producer price data, due for release on Thursday, will provide clues on categories that feed more directly into the Fed's preferred inflation gauge, which is based on the Personal Consumption Expenditures (PCE) price index and will be released later this month. So far this year, core inflation measured by the PCE has generally run higher than the CPI measure. The US Bureau of Economic Analysis will adjust the price calculation methodology for some components of the PCE index in September, including legal services, computer software, and investment advice.

A separate report on Wednesday, which combined inflation data with recent wage data, showed that real average hourly earnings fell 0.2% year-over-year in July, continuing a string of weak readings that began with the start of the Iran conflict.