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Inflation Holds at 13-Year Highs but July Core Prices Moderate; Stocks Extend Gains

Core consumer prices eased from a multi-decade high last month, suggesting the Fed's patience on inflation could be justified heading into the final half of the year.

U.S. consumer price inflation accelerated at thirteen year highs last month, data from the Bureau of Labor Statistics indicated Wednesday, but moderated slightly from its prior pace, suggesting the Federal Reserve's patience on tapering should continue to hold. 

Headline CPI for the month of July was estimated to have risen 5.4% from last year, matching the reading highest since 2008, and 0.5% when compared to the June reading, with both tallies coming in largely in-line with Wall Street forecasts. The month-on-month reading slowed from a pace of 0.9%, the BLS said.

So-called core inflation, which strips-out volatile components such as food and energy prices, rose 0.3% on the month and 4.3% on the year, the report noted, down from last month's 4.5% reading, which was the highest since the early 1990s.

"Today’s CPI data should help assuage investor fears that the Fed is too laid-back about inflation pressures," said Seema Shah, chief strategist at Principal Global. "The details of the data release suggest some easing in the reopening and supply-shortage driven boost to prices, and tentatively suggests that inflation may have peaked. Investors in the transitory camp will feel slightly vindicated."

"Yet, while the data should reassure markets that inflation isn’t on a relentless upward trend, make no mistake – this inflation report is still hot," shah added. "The Fed should consider this as yet more evidence of 'substantial' progress towards their goals, and surely a deep-dive discussion into tapering will be on the top of their agenda at the September FOMC meeting."

U.S. equity futures were added to early gains immediately following the data release, with futures contracts tied to the Dow Jones Industrial Average indicating a 75 point opening bell jump and those linked to the S&P 500, which printed its 56th record high on Tuesday, priced for an 8 point bump to the upside

Benchmark 10-year U.S. Treasury bond yields, meanwhile, edged lower to 1.347% ahead of a $41 billion auction later this morning, while the dollar index was marked 0.1% lower against a basket of its global peers at 92.965.

Earlier this week, Fed officials began to signal the potential for changes to the central bank's $120 billion pace in monthly bond purchases, with Atlanta Fed President Raphael Bostic going so far as to suggest rate hikes in late 2022.

Last week, the BLS said that 943,000 new jobs were added to the economy in July, with upward revisions to strong tallies for June and May. That was buttressed by data showing average hourly earnings rose at an annual 4% clip to $30.54, the highest on record. 

On the fiscal side, last night's narrow Senate passage of a $3.5 trillion spending package, including a $1 trillion infrastructure bill, will only add to concerns of a fiscal policy push that could hold inflation levels higher for an extended period of time.