Inflation data released this week did not provide the Federal Reserve with any basis for tightening its interest rate stance at its September meeting, according to Citi analysts.
In a note to clients, the analysts emphasized that underlying consumer price growth in the US is trending downward, and oil prices are likely to decline from current levels. Therefore, they believe "there is no new evidence supporting tightening that would push the committee to the harder end of the dotted line or disrupt the consensus in favor of a pause in September."
The analysts also added that the data supports the "bias toward no rate hikes" in the final six months of 2026, rather than confirming the tightening that occurred in June.
The consumer price index (CPI) for July was "soft and generally unremarkable," the analysts note. On an annualized basis, the headline CPI fell to 3.4% for the twelve months ending July, in line with forecasts, from 3.5% in June. Monthly inflation, as expected, rebounded to 0.1% after falling 0.4% in the previous period.
The energy index, which has been in focus amid the recent surge in oil prices caused by the Iran-related war, fell 1.5% month-on-month, although it rose 14.7% year-on-year. Gasoline prices, in particular, fell 2.9% month-on-month, declining for the second consecutive month. The fall in pharmaceutical prices was partially offset by a sharp rise in the prices of video and audio equipment, which Capital Economics analysts attribute to potential cost pressures stemming from the rapid development of artificial intelligence infrastructure. Oil prices have fluctuated wildly in recent weeks amid conflicting news from the Middle East, with hopes for a long-term settlement and the resumption of shipping through the Strait of Hormuz—a crucial route for global oil supplies, effectively closed for months—fluctuating between rises and falls.
Excluding volatile components such as energy and food, the so-called "core" CPI rose 0.2% month-on-month and 2.5% year-on-year, in line with expectations.
Fears persist that the energy shock will trigger a wave of inflation and force the Federal Reserve to raise interest rates in response. However, weaker-than-expected labor market data for July have reduced expectations for higher borrowing costs at the Fed's upcoming September meeting. According to CME FedWatch, the likelihood that the Fed will leave rates unchanged next month is about 71%, while the likelihood of a rate hike is about 28%.
In theory, raising interest rates could curb inflation, but comes with the risk of negatively impacting the labor market and overall economic activity.