A key measure of U.S. consumer prices unexpectedly accelerated in July in a broad-based advance, signaling inflation may be firming as the Federal Reserve debates whether to lower interest rates further.

The core consumer price index, which excludes food and energy, rose 0.3% from the prior month, and 2.2% from a year earlier, according to a Labor Department report Tuesday. Both gains exceeded the median estimates of economists, while the broader CPI advanced 0.3% on the month and 1.8% annually.

Faster inflation may strengthen the hand of policy makers who are reluctant to keep lowering borrowing costs following last month’s quarter-point reduction, as employment and consumer spending remain solid. At the same time, the latest ratcheting-up of U.S.-China trade tensions and a deepening global economic slowdown are weighing on the outlook, with investors pricing in two to three more moves this year.

Following the report, traders trimmed slightly the amount of Fed easing they have priced in for this year while the 10-year Treasury yield climbed to its high for the day and the U.S. dollar gained.

Policy makers have struggled to lift inflation toward their 2% target, which is based on a separate Commerce Department index that tends to run slightly below the Labor Department’s CPI. President Donald Trump has repeatedly cited low inflation in his attacks on the Fed and calls for deeper interest-rate cuts.

The 2.2% annual gain in the core CPI followed 2.1% in June and marked the fastest increase since January. The index rose an annualized 2.8% over the past three months, the most since early 2018. The two-month gain of 0.6% was the most in more than a decade.

Underlying Trend

While the Fed officially targets inflation including all items, policy makers look to the core measures for a better sense of the underlying trend because food and energy prices tend to be volatile.

Tariffs on a wide range of consumer products imported from China, set to take effect Sept. 1, may boost inflation further. In addition, declining yields on 10-year Treasuries have effectively wiped out any inflation-adjusted return on the security.

Many key measures within the Labor Department’s gauge advanced in July. Shelter costs, which make up about a third of total CPI, rose 0.3% for a second month, while medical care was up 0.5%, apparel advanced 0.4% and used cars and trucks rose 0.9%.

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