US Inflation Surpasses Mexico for the First Time as July CPI Hits 3.4%

• US inflation fell to 3.4% in July from 3.5% in June, putting US price growth above Mexico’s in the latest comparison
• Markets have cut September Fed rate-hike expectations, while gold climbed to a more than two-month high following the CPI report
• The upcoming PPI report could provide the next major clue on whether inflation is cooling enough to change the Fed’s rate path

US inflation is currently in an unusual spot. For years, Mexico has had the higher inflation rate, but the latest numbers have flipped that relationship. July’s data also gave markets something else to work with as traders reconsidered the Federal Reserve’s next move. The reaction was quick in gold, which pushed to a more than two-month high after the report.

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US Inflation Moves Above Mexico as Fed Rate Bets Shift

The latest US inflation rate came in at 3.4% in July, down from 3.5% in June, according to the Bureau of Labor Statistics. Core CPI, which excludes food and energy, rose 2.9% over the year. The headline figure was in line with economists’ expectations.

The Mexico comparison is what makes the number stand out. Mexico’s annual inflation rate was around 3.4% in the latest reading. This put the two countries almost level. The chart tracking the two economies shows how much that gap has narrowed over the past couple of years.

For the Federal Reserve, the July CPI report takes some pressure off the need for another increase. Markets are now pricing roughly a 34% chance of a September Fed rate hike. This is down sharply from previous levels.

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Gold Gets a Lift From Inflation

The move was already visible in gold prices. Spot gold jumped about 1% after the CPI release, reaching its highest level since June 5 before settling near $4,408.55 an ounce.

Lower expectations for interest rates tend to help gold because investors give up less by holding an asset that does not pay interest. Tim Waterer, chief market analyst at KCM Trade, said traders were waiting for the upcoming PPI report before making their next move. Waterer added,

“Gold is in consolidation mode today after its post-CPI gains, ​with near-term expectations of a Fed rate hike being dialled back another notch.”

A softer producer-price reading would add to the case that price pressures are easing, while a harsher number could put some of the recent September Fed meeting rate-cut optimism back under pressure.

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