U.S. consumer prices rose moderately in July and the annual increase in inflation slowed to below 3% for the first time in nearly 3-1/2 years, opening the door wider for the Federal Reserve to cut interest rates next month.

The consumer price index rebounded 0.2% last month after falling 0.1% in June, the Labor Department's Bureau of Labor Statistics reported. The rise was in line with economists' expectations. Before rounding up, the CPI increased 0.155%.

In the 12 months through July, the CPI increased 2.9%. That was the first sub-3% reading and smallest gain since March 2021. Consumer prices advanced 3.0% on a year-on-year basis in June.

Annual consumer price growth has moderated considerably from a peak of 9.1% in June 2022 as higher borrowing costs cool demand. Details of the CPI and PPI reports pointed to tamer July readings of the personal consumption expenditures (PCE) price indexes, which are tracked by the Fed for monetary policy.

Economists' estimates for the PCE price index, excluding the volatile food and energy components, ranged from a gain of 0.1% to 0.18%. The so-called core PCE price index rose 0.2% in June. Core inflation was forecast to increase 2.6% on a year-on-year basis, matching June's advance.

Financial markets boosted the odds of a 25-basis-point rate cut at the Fed's Sept. 17-18 policy meeting to 54.5% from 49.5% before the data, according to CME Group's FedWatch tool. They saw a 45.5% chance of a half-percentage-point rate reduction.

The central bank has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range for more than a year, having raised it by 525 basis points in 2022 and 2023.

The core CPI rose 0.2% in July after edging up 0.1% in June. It gained 0.165% before rounding. Core inflation was driven by a 0.5% increase in rents, which followed a 0.3% advance in June.

Source: Reuters