Inflation fell slightly in July from its June peak. That does not mean that the Federal Reserve will soon pivot away from its rate hike push.

The consumer price index jumped 8.5% from July 2021 to July 2022, the Bureau of Labor Statistics reported August 10. Economists had expected an increase of 8.7%, according to economic research service Econoday.

Energy prices continued to experience the biggest year-over-year increases in July, although they eased somewhat from June. Fuel oil was up 75.6% from July 2021 to July 2022 after increasing by 98.5% from June 2021 to June 2022. Similarly, gasoline increased 44% year over year in July, compared to nearly 60% in June.

'The right direction'

"Price pressures are beginning to ease," said Tom Essaye, a trader and founder of the financial research firm Sevens Report Research, in an interview. "It's certainly a move in the right direction."

Still, a single report showing some slowdown in rising prices will not drive the Fed to ease plans to raise rates further this year, Essaye said.

"This report is not going to make the Fed any less hawkish," said Essaye, who expects the central bank to continue to hike rates until year-over-year inflation falls to about 5%.

"Inflation is slowing, and that's a huge psychological step for the markets," said Callie Cox, a U.S. investment analyst at eToro. "But I'm skeptical that this is enough for the Fed to dust its hands off."

While gas and goods prices are falling, Cox said, services inflation, including rent, insurance and healthcare, continues apace.

"That's pure demand," Cox said. "In my mind, this report is not great, but it may have just marked the worst point for inflation in this cycle and that means something."

Wages flat

As prices have risen, wages have not kept pace.

Hourly wages rose by 5.2% from July 2021 to July 2022, matching the June figure and down from the 5.6% year-over-year growth seen in March, when annual wage growth may have peaked.

Inflation also continues to impact regions of the U.S. differently, the index data shows.

Year-over-year inflation in July hit 9.4% in the Southern states, for example, but 7.3% in the Northeast.

In June, the index jumped 9.1% from June 2021, the biggest year-over-year increase since November 1981. The sharp climb in inflation, along with a jobs report showing falling unemployment and a booming labor market, boosted the odds that Fed would raise its benchmark federal funds rate by 75 basis points at its September meeting.

But shortly after the consumer price index report was released Aug. 10, odds of a 50-basis-point increase from the Fed in September jumped to about 62%, about double what the odds were before the report's release, according to the CME FedWatch Tool, which measures investor sentiment in the Fed funds futures market. Odds of a 75-point rise in September, which were about 68% before the report, fell to about 38% after, according to the tool.

The odds will likely fluctuate as the Fed's September meeting nears and more data, including the consumer price index and jobs reports for August, will be released.