The U.S. Consumer Price Index came in at 0.1% on the headline rate in July, and up 0.2% on the core rate.

Bank of Montreal notes that energy prices rose a solid 0.4%, “though this was smaller than had been feared in the face of a reported jump in gasoline prices. Despite the rise, overall inflation remains very moderate.”

CIBC World Markets says that it expects the headline CPI rate will drift above 2% by year-end as the year-over-year energy cost comparison turns positive. But core inflation should settle near 2%. “Despite these tame headline figures, the underlying details show that America is still a long way from a Japan-like deflation threat. While core goods prices are down 1.3% year-on-year, representing the lack of pricing pressure from a slackened U.S. manufacturing sector, prices for core services are up a full 3.8% year-on-year.”

Also, July housing starts in the U.S. dropped a greater-than-expected 2.7% to an annualized 1.649 million units. But BMO says with building permits coming in at a greater 1.698 million, the downward trend in starts may not persist. BMO Nesbitt Burns notes, ” Despite the second consecutive month of decline, U.S. housing starts remain at a high level. A 32-year low in mortgage rates along with falling stock prices have made housing an attractive investment for Americans. With the possibility of further rate cuts and strong permit data, we expect the U.S. housing sector to remain solid.”

“With both inflation and housing starts coming in moderately weaker than expected, long bond yields moved moderately lower. The data will not add further to the Fed’s concerns about too weak growth, but are consistent with the central bank holding interest rates steady at current low levels,” says BMO.

“While inflation is not much of a market mover, it remains tame enough for the Fed to ease if further deterioration in financial markets forces its hand,” says CIBC.

BMO Nesbitt Burns says, “There remain no signs of inflation in the U.S. CPI for the Fed to get worried about. Their focus will remain on the turmoil in the financial markets and its possible effects on the strength of the economic recovery.”

U.S. CPI
http://www.bls.gov/news.release/cpi.nr0.htm