Here are five key takeaways from the July CPI inflation report

Readings for July on the prices consumers pay for goods and services came in pretty much on target Wednesday, driving traders to lower odds for a September interest rate hike even though inflation remains well above the Federal Reserve’s 2% target.

Here are five key takeaways from the Bureau of Labor Statistics report:

1. Right on target: The consumer price index rose 0.1% for the month, putting the annual rate at 3.4%. Respective core readings were 0.2% and 2.5%. Both numbers helped feed a narrative that while inflation is still a problem, it seems less so after two consecutive months of benign readings.
2. Gassing up for August: But hold on a minute. Both the June and July moderations came largely because of easing in the CPI energy index, which is down 7% from its May historical peak. Crude oil has jumped 10% over the past week, posing upside risks for the August CPI reading unless things cool down in the Middle East.
3. Gimme shelter (?): A key ingredient in the inflation run has been shelter, and on that front there has been some good news: The shelter index, which comprises about one-third of the CPI weighting, has risen just 0.1% in the past two months, providing hope on that front as well. Except … much of the work in that regard has been done by sharp declines in the “lodging away from home” category, which has posted sharp declines in three of the past four months. Owners’ equivalent rent, an important category that puts a hypothetical rental value on owner-occupied properties, has held fairly steady during the same period.
4. The pre-war story: Put all the numbers together, and you now have core inflation running right where it was prior to the U.S. and Israel attack on Iran in late February. That’s a pretty simple narrative: Were it not for all the turmoil in the Middle East, inflation outside of food and energy — especially the latter — would be heading right back to target.
5. The Fed factor: Traders took that benign core number, added it to last Friday’s weak nonfarm payrolls report for July, and came up with an equation that substantially lowered the odds for a rate hike at the Fed’s Sept. 15-16 policy meeting. The market as of late Wednesday morning was pricing in just a 38% chance of a move, down 10 percentage points from Tuesday and well below the 70% or so probability of a month ago, according to the CME Group’s FedWatch, which puts the best chances now on December.