Headline US consumer prices rose by less than anticipated in July, putting downward pressure on short-term yields as market participants brace for a more cautious approach from the Federal Reserve. According to data released by the Bureau of Labor Statistics this morning, the consumer price index climbed 8.5 percent in July from the same period last year, essentially flat on a month-over-month basis. Economists polled by major data providers expected a 9.1 percent annual gain and 0.2 percent relative to June.

A 4.6 percent month-over-month drop in energy prices — helped by an 7.7 percent tumble in the gasoline sub-index. New vehicle prices ratcheted 0.6 percent higher after rising 0.7 percent in June, and the index for used cars and trucks fell -0.4 percent in July. Shelter costs also lost momentum, rising 0.4 percent, as rents and owners equivalent measures moved up by less than expected.

Services inflation increased 0.3 percent, with transportation down -2.1 percent, and medical care 0.4 percent higher. Airfares plunged -7.8 percent from the prior month.

With highly-volatile food and energy components excluded, core prices rose 5.9 percent year-over-year, up 0.3 percent over the prior month. This was much slower than the 0.5 percent expected in markets.

Two- and ten-year bond yields dropped after the data hit the wires, and the dollar snapped sharply lower.

Post-release implied market pricing suggests odds on a 75 basis point Federal Reserve hike in September are down to less than 65 percent, after breaking the 80-percent barrier a week ago. But inflation continues to run far above the Fed’s target zone, meaning that central bankers are likely to keep the tightening pedal on the floor for many months to come.

Karl Schamotta, Chief Market Strategist