The U.S. annual inflation rate slowed for the fourth consecutive month in July and came in below market forecasts, raising the odds of the Federal Reserve cutting interest rates in September.
According to the Bureau of Labor Statistics (BLS), the consumer price index (CPI) eased to 2.9 percent last month, down from 3 percent in June. The consensus estimate was 3 percent.
On a monthly basis, the CPI rose 0.2 percent, up from the 0.1 percent decline in the previous month. This was in line with market expectations.
Core inflation, which omits the volatile food and energy categories, also slipped to 3.2 percent last month, down from 3.3 percent. The reading matched market estimates.
The core CPI jumped 0.2 percent month-over-month, up from 0.1 percent and mirroring economists’ estimates.
Shelter was the primary driver of inflation last month as it has remained stubbornly high, despite expectations that this part of the CPI data would ease by now.
The shelter index increased 0.4 percent from June to July and was up 5.1 percent from a year ago.
U.S. home prices have been touching record levels based on the National Association of Realtors (NAR) and S&P CoreLogic Case-Shiller numbers. Last month, Redfin reported that rents decreased in July for the first time since June 2020, with the national median asking rent slipping to $1,647.
The energy index was flat and is up 1.1 percent in the 12 months ending in July. This included gasoline rising 0.1 percent, electricity edging up 0.1 percent, and utility-piped gas services tumbling 0.7 percent.
Energy prices have been a mixed bag this summer. Crude oil and gasoline costs had been subdued in July, but they have witnessed a resurgence in August, driven primarily by geopolitical tensions and tightness in the international market.
Still, year-to-date, the U.S. oil benchmark is up 10 percent to nearly $79 a barrel. The national average price for a gallon of gasoline is also up about 10 percent to $3.41.
Motor vehicle insurance, which has rocketed in 2024, was another contributor to inflation last month, surging 1.2 percent monthly. On a 12-month basis, this CPI component has surged 18.6 percent.
Services inflation slowed to 4.9 percent, the first reading below 5 percent since earlier in the year.
Looking ahead to next month’s CPI report, the Federal Reserve Bank of Cleveland’s Inflation Nowcasting model expects the annual inflation rate to ease to 2.7 percent and the core CPI to come in at 3.4 percent.
The latest CPI numbers come after the producer price index (PPI)—a gauge of prices paid for goods and services by businesses—rose less than expected in July.
Consumers are becoming increasingly optimistic that the U.S. economy could be turning a corner on inflation.
The New York Fed’s July Survey of Consumer Expectations (SCE) showed that the one-year inflation outlook was unchanged at 3 percent. The median three-year-ahead inflation expectations fell sharply by 0.6 percent to a record low of 2.7 percent. The five-year inflation outlook was unchanged at 2.8 percent.
Market Reaction
The U.S. financial markets were little changed following the CPI report in pre-market trading, with the leading benchmark indexes wobbling.
U.S. Treasury yields were mostly up across the board. The 10-year yield was flat at 3.85 percent. The 2-year yield firmed above 3.96 percent, while the 30-year bond held steady at 4.15 percent.
The White House says the latest CPI report is further evidence that the United States is making progress in the inflation fight.
“Inflation has fallen below 3% and core inflation has fallen to the lowest level since April 2021,” President Joe Biden said in a statement. “We have more work to do to lower costs for hardworking Americans, but we are making real progress, with wages rising faster than prices for 17 months in a row.”
The U.S. Dollar Index (DXY), a measurement of the greenback against a basket of currencies, erased its losses and topped 102.60.
The latest inflation reading should be enough for the Fed to cut rates, said Bryce Doty, the senior vice president and senior portfolio manager at Sit Investments Associates, in an email to The Epoch Times.
“With CPI coming in as expected at a manageable 0.2%, year over year core CPI is down to 3.2% and low enough for the Fed to cut rates and still have a very large real fed funds rate,” he said in a note. “This gives the Fed the ability to cut while making the case that a high real fed funds rate is restrictive and supportive of bringing inflation down further.”
Fed Readies for Rate Cut
Following last month’s post-meeting press conference, Fed Chair Jerome Powell kept a September interest rate cut on the table.
Monetary policymakers have been gaining more confidence that inflation is heading sustainably toward the central bank’s 2 percent target. Powell and his colleagues are now concerned about the softness brewing in the labor market.
Although market watchers have feared that the United States could be in or on the cusp of a recession after the Sahm rule was activated, officials have downplayed downturn concerns.
“A recession is not in my outlook. There is still enough momentum in the economy where we can see slowing and not see the labor market deteriorate to a level of considerable concern,” said Atlanta Fed President Raphael Bostic on Aug. 13 during an event by the Conference of African American Financial Professionals in Atlanta.
“Right now, we’re not hearing a lot of layoffs. We’re not hearing a lot of hiring. Everyone is in a hold mode, he added. “As long as that continues, I think we will be in a good place.”
With the futures market overwhelmingly penciling in a rate cut next month, the debate is how far and fast the Fed will ease policy.
Jay Woods, the chief global strategist at Freedom Capital Markets, said in an email to The Epoch Times that it might depend on all the data released by the two-day policy meeting scheduled for Sept. 17 and 18.
“In fact, every reading between now and the September FOMC [Federal Open Market Committee] meeting will be put under the microscope as investors look to see the decelerating trend continue and keep that rate-cutting narrative alive and well,” Woods said in a note.
Over the next several weeks, the Fed will digest more employment and inflation data before deciding on the policy rate.
Despite cooling inflation pressures, the data suggest that consumers are still struggling with rising prices, higher borrowing costs, and a cooling job market, said Mark Hamrick, the senior economic analyst at Bankrate.
“Even with the ‘as expected’ readings, prices broadly continued to rise last month,” he wrote.
“At issue is the weighting to be applied by Federal Reserve officials regarding the maximum employment portion of their dual mandate versus stable prices. The unemployment rate has risen to 4.3 percent and hiring has been slowing. It seems reasonable to assume that interest rates are currently too restrictive.”
From The Epoch Times