Persistently low energy prices kept US inflation stifled in July, leaving forecasts for a further two interest rate increases this year looking increasingly doubtful and undermining the dollar.
While picking up more quickly than personal consumption expenditure (PCE) – the Federal Reserve's preferred measure of inflation – the consumer price index (CPI) remained stubbornly below the Fed's target rate of 2%.
July CPI rose at an annual pace of 1.7% in July, up from 1.6% in June, but missed forecasts of a rise to 1.8%.
Policymakers at the Federal Reserve have repeatedly said that price pressures would increase as slack in the labour market is removed. But despite continued jobs growth, inflation is taking its time to respond.
The Fed's favoured measure of inflation lags even further behind, with the PCE measure currently registering an annual rate of 1.4% in June.
"The Federal Reserve doves will seize on this subdued headline reading as further evidence backing the case for a period of stable interest rates," said James Knightley at ING.
US data in the coming week could enlighten investors on the prospects for inflation in the coming months as manufacturing surveys from the Fed's New York and Philadelphia districts and retail sales are published.
Data also on export and import prices could be important, as the dollar's 10% fall since the start of the year should be making imported raw materials and luxury goods more expensive.
The Fed still believes that inflation will be back at target by the end of the year, as does Knightley at ING: "This brings to an end four-consecutive months of deceleration and we think that further rises are likely in the months ahead."
The main reaction was with the dollar on Friday. The dollar index, a trade-weighted measure of the greenback against a basket of other currencies, was down 0.14% in early New York trade.
The dollar fell 0.3% versus the euro, however, to $1.1803.
"US interest rates were hovering around zero for the best part of a decade while the Fed accumulated over $4tn worth of assets via QE, leading some to warn the only possible result would be runaway inflation.
"Instead, US inflation is like the most timid of creatures, and when it does rear its head, like it did earlier this year, it soon shuffles back into its den," said Michael Baxter, economics commentator at The Share Centre.