US inflation fell to 2.9 per cent in July, bolstering the case for the Federal Reserve to cut interest rates at its next meeting in September.
The annual rise in the consumer price index was just 0.1 percentage points below June’s rate, and undercut economists’ expectations that the figure would hold steady at 3 per cent.
It also marked the first time headline CPI has fallen below 3 per cent since March 2021.
Core CPI, which excludes volatile food and energy prices, rose by 3.2 per cent, compared with 3.3 per cent in June, according to data published by the Bureau of Labor Statistics on Wednesday.
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The latest figures will raise hopes that the Fed is succeeding in quelling price pressures and will be welcomed in the White House. US voter disquiet about inflation has been a headwind for Democrats in this year’s presidential election campaign.
“Overall I find [the data] encouraging,” said David Kelly, chief global strategist at JPMorgan Asset Management, adding that it should give the Fed “further confidence” that price pressures are heading towards its 2 per cent target.
Fed officials have sought more evidence that inflation is cooling sustainably before lowering borrowing costs as Americans show signs of reining in their spending.
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But a sharp decline in jobs growth earlier this month fanned fears that the central bank has waited too long to cut rates, and sparked a bout of turmoil across US financial markets last week.
“I think the Fed has moved on from inflation to labour,” said Tom Porcelli, chief US economist at PGIM Fixed Income, referring to the central bank’s focus in determining when to lower borrowing costs. “And this report I think only will reinforce that shift.”
Mr Kelly added that the August jobs report, which is released in early September, “is going to be the most important of the year”.
Before the data release, investors were evenly split over whether the central bank would deliver a quarter-point or half-point reduction in borrowing costs at its next meeting in September.
Following the figures, futures markets moved marginally in favour of the smaller cut. Investors continued to expect a full percentage point of cuts by the end of the year.
“The bottom line is this keeps the Fed on track for 25 basis points in September,” said Dean Maki, chief economist at Point72. “I think that for the Fed to cut by 50 basis points in September would require a further weakening in the labour market.”
US stocks edged higher after the New York opening bell, with the benchmark S&P 500 index adding 0.2 per cent and the technology-heavy Nasdaq Composite gaining 0.4 per cent.
In government bond markets, the interest rate-sensitive two-year Treasury yield rose 0.04 percentage points to 3.98 per cent. Yields rise as prices fall.
The latest data comes after the Fed rapidly ratcheted up interest rates to fight inflation that hit multi-decade highs in 2022 due to supply bottlenecks and a surge in demand following the Covid-19 pandemic.
The US central bank has held rates at a 23-year high of 5.25-5.5 per cent for more than a year.
Increases in housing-related expenses accounted for nearly 90 per cent of the 0.2 per cent monthly increase for CPI, according to the BLS. That also helped to push up services inflation to 0.3 per cent for the month.
US president Joe Biden said the latest figures showed that “we continue to make progress fighting inflation and lowering costs for American households”.
According to data released earlier this month, the US jobs market grew more slowly than expected in July. The unemployment rate also has risen for four straight months, to 4.3 per cent, sparking fears that the economy is weakening.
Some economists have warned that unless the central bank cuts borrowing costs sharply soon, it risks triggering a more severe economic contraction. – Copyright The Financial Times Limited 2024
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