US Inflation Climbs 3.2% In July

What just happened?

Forget your frantic inflation fears, at least for the US – July's figures were actually a relief, not a shocker. Let's break down the year-over-year numbers:

• Headline inflation (white line): up 3.2%.
• Core inflation (headline minus those unpredictable food and energy costs, in blue): up 4.7%.
• Supercore inflation (core minus housing costs, in orange): 4.12%

All three hit the mark with what the number-crunchers predicted. But, there was something intriguing in the data: for the first time since inflation peaked in the US more than a year ago, these yearly rates nudged up a bit from the month before. Now, before you start panicking about prices going haywire again, remember the "base effects" – it's a fancy term for keeping in mind what last year’s numbers were like. And in this case, they were quite low so, by comparison, this year's were bound to be higher. Yep, the market saw it coming.

What does it mean?

The Federal Reserve (the Fed) will probably be the first to find this data reassuring. Sure, there will still be another inflation report and another jobs report to consider before the central bank has to make its next interest-rate decision in September, but the likelihood of a nasty inflation surprise between now and then just got a bit slimmer. So it seems the door is now ajar for the Fed to keep rates as they are for a while, instead of hiking them again.

But let me play my usual devil’s advocate role here. Holding rates steady isn't the same as slashing them, and we're probably looking at core inflation sticking above 4% for the rest of the year. That's too high for the Fed's liking, and unless the economy takes a significant nosedive and drags the job market down with it, those hoped-for interest rate cuts might well remain out of reach.

In fact, it’s worth still paying attention to the risk of a potential rebound in inflation, which could happen next year as the effect from the reacceleration of the economy feeds through prices. A sticky mix of higher interest rates and surging consumer prices (yes, they're already higher and still climbing) is likely to eventually crash the festivities for consumers, businesses, and investors alike.

What does it mean for my portfolio?

This report may have been a quiet one, but it's humming a positive tune. It dials down the risk of inflation making a comeback – at least in the short term – and that will let the stock market enthusiasts keep the party going. For bondholders who have been feeling the heat lately (remember that inflation tends to be their nemesis as it drives bond prices down and nibbles away at the purchasing power of both coupons and principal), this is a soothing chill track.

So for the time being, we can all enjoy a little stability. Just don't let the melody lull you into complacency; we're dancing in an increasingly unpredictable world, and the rhythm could change faster than you can switch tracks. Stay on your toes.