(Bloomberg) — The Federal Reserve’s goal to spur economic growth enough to generate stronger inflation will probably take longer to achieve.
The consumer price index climbed 0.1 percent in July, the smallest advance in three months, after a 0.3 percent gain in June, a Labor Department report showed Wednesday in Washington. Costs over the past 12 months increased 0.2 percent.
A plunge in commodities and a stronger dollar will keep a lid on costs for goods such as clothing and electronics, making the Fed’s inflation target even more elusive. With rents among the only areas seeing sustained gains, the pickup in prices that began earlier this year is dissipating.
“The little bit of inflation uptick there had been is fading,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who correctly forecast the increase in consumer prices. “It’s hard for policy makers to be reasonably confident that inflation is heading back toward that 2 percent target.”
Treasury securities rose as minutes from the Fed’s July meeting damped expectations for an interest-rate increase next month. The yield on the benchmark 10-year note fell to 2.11 percent at 3:30 p.m. in New York compared with 2.19 percent late on Tuesday.
Central bankers said last month that while conditions for raising interest rates were approaching, they needed more confidence inflation is moving toward their goal, according to meeting minutes.
The median forecast of 78 economists surveyed by Bloomberg forecast consumer prices would rise 0.2 percent. Projections ranged from a 0.1 percent decline to 0.3 percent increase.
The so-called core index, which excludes food and fuel, also climbed 0.1 percent in July following a 0.2 percent increase the prior month. That index was up 1.8 percent from July 2014.
Over the past three months, core prices also climbed at a 1.8 percent annualized rate. That’s down from a 2.6 percent annualized increase in the three months ended April, signaling emerging price pressures have subsided.
Higher prices for shelter, including rents and hotel rates, are helping prop up inflation, offsetting declines in a broad stretch of categories, including air fares, new and used cars and household furnishings.
Air fares plunged 5.6 percent in July, the most since December 1995, showing how falling fuel costs can ripple through the economy.
“The July CPI results are consistent with a lengthening of the timeline for inflation to return toward the Fed’s target,” Bloomberg Intelligence economists Carl Riccadonna and Josh Wright wrote in a research note. “While core inflation is not far from the Fed target for overall inflation, the fact that it is primarily a rent story — and little else — makes the limited progress to date even less impressive.”
Fed policy makers have twin goals of maximum sustainable employment and inflation of around 2 percent. The progress made toward achieving these objectives will dictate when, and how often, they’ll raise interest rates.
The Fed’s preferred price measure, linked to consumer spending, climbed 0.3 percent in June from a year before. It’s been under the Fed’s target for more than three years.
The policy making Federal Open Market Committee next meets on Sept. 16-17, and 77 percent of forecasters in a Bloomberg survey taken Aug. 7-12 said the central bank will raise its main policy rate next month. Futures show traders see about a fifty percent chance of an increase next month.
Because the slowdown in inflation last month could be linked to such a narrow category as air fares, some economists said it will prove temporary.
“I do not expect this set of numbers to deter the FOMC from raising rates next month,” Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in Stamford, Connecticut, said in a research note. “Inflation is far from running away, but, outside of the energy component, prices are likely to at least maintain the current pace as the economy continues to grow” and the labor market strengthens, he said.
–With assistance from Chris Middleton in Washington.