American prices rose 0.2% in July from the month before, holding the annual rate of inflation at 3.7%, according to figures published this afternoon by the Bureau of Economic Analysis, the US agency that compiles the personal income and spending accounts. Economists had expected the annual rate to ease to 3.6%. The reading undoes June's 0.1% monthly fall, which had been the first negative print since 2020.
Core inflation, which strips out food and energy and is the gauge the Federal Reserve watches most closely, held at 3.3% over the year and rose 0.2% on the month, both in line with forecasts. Underneath, the composition was uneven. Personal income rose $115.1 billion, or 0.4%, but spending added only $36.3 billion, or 0.2%, and once prices are stripped out the volume of goods and services bought barely moved, up less than 0.1%. Services spending rose $86.2 billion while goods spending fell $49.9 billion. Households are paying more and getting no more for it. The saving rate held at 3.0%.
That leaves the Fed with inflation at 3.7% against a 2% target three weeks before it decides on rates. The July payrolls report, which showed employers cutting 23,000 jobs, had pushed the case for an increase to one side. The Fed held its benchmark rate at 3.50% to 3.75% on 29 July with three policymakers dissenting in favour of a rise, and futures markets now put the odds of a quarter point increase on 16 September at around 38%, down from 55% a month ago. Kevin Warsh gives his first Jackson Hole keynote as chair on Friday, two days after this release.
What it means for GBP/USD
The pound was trading around 1.3620 against the dollar as the figures landed, at the bottom of the range it has held all week after repeatedly failing at 1.3660, though still close to a six month high. Sterling's strength this month has come from the dollar side rather than from home: Bank Rate has been held at 3.75%, and Andrew Bailey has warned that energy volatility could push UK inflation higher into the autumn rather than lower. With an inflation reading that argues for a Fed rise, a jobs report that argues against one, and Warsh due on Friday, the pair looks likely to hold its range until he speaks. For a business paying dollar suppliers or staff later in the year, a forward contract fixes today's rate for a settlement date up to two years out and takes Friday out of the budget.
