US inflation falls to 2.9% in July

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In July, US inflation dropped to 2.9 percent, strengthening the argument for the Federal Reserve to reduce interest rates at its upcoming meeting in September.

The yearly increase in the consumer price index was only 0.1 percentage points lower than June’s rate and fell short of economists’ predictions that it would remain stable at 3 percent.

This also marked the first time the headline CPI fell below 3 percent since March 2021.

Core CPI, which excludes volatile food and energy prices, increased by 3.2 percent, compared to 3.3 percent in June, according to data released by the Bureau of Labor Statistics on Wednesday.

The latest data provides hope that the Fed is effectively controlling price pressures, which will be well received in the White House. Concerns about inflation among US voters have been a challenge for Democrats in the current presidential election campaign.

“I find the data encouraging overall,” said David Kelly, chief global strategist at JPMorgan Asset Management, noting that it should give the Fed more confidence that price pressures are moving towards its 2 percent target.

Fed officials have been looking for more evidence that inflation is sustainably cooling before lowering borrowing costs as Americans show signs of tightening their spending.

However, a significant decline in job growth earlier this month raised concerns that the central bank may have waited too long to cut rates, causing turmoil in US financial markets last week.

“I believe the Fed has shifted its focus from inflation to labor,” said Tom Porcelli, chief US economist at PGIM Fixed Income. “And this report will only reinforce that shift.”

Kelly added that the August jobs report, due in early September, “will be the most crucial of the year.”

Prior to the data release, investors were split on whether the central bank would implement a quarter-point or half-point cut in borrowing costs at the September meeting. Following the release, futures markets slightly favored the smaller cut, with investors still anticipating a total of one percentage point in cuts by the year’s end.

“In essence, this keeps the Fed on track for a 25 basis point cut in September,” said Dean Maki, chief economist at Point72. “I believe for the Fed to cut by 50 basis points in September, there would need to be further weakening in the labor market.”

After the New York opening bell, US stocks saw slight gains, with the S&P 500 index rising by 0.2 percent and the Nasdaq Composite gaining 0.4 percent.

In the government bond markets, the two-year Treasury yield, sensitive to interest rates, increased by 0.04 percentage points to 3.98 percent. Yields rise when prices fall.

The latest data follows the Fed’s rapid increase in interest rates to combat inflation, which reached multi-decade highs in 2022 due to supply chain disruptions and increased demand following the Covid-19 pandemic.

The US central bank has kept rates at a 23-year high of 5.25-5.5 percent for over a year.

Rises in housing-related costs contributed to nearly 90 percent of the 0.2 percent monthly CPI increase, according to the BLS. This also pushed up services inflation to 0.3 percent for the month.

The energy index remained unchanged in July after two consecutive months of declines, while costs related to airfare, apparel, and used vehicles helped temper the overall inflation rate.

On Thursday, US President Joe Biden stated that the latest data indicates that “we are making progress in combating inflation and reducing costs for American households.”

Recent data showed that the US job market grew slower than expected in July. The unemployment rate has also risen for four consecutive months to 4.3 percent, prompting concerns about a weakening economy.

Some economists have cautioned that without a significant reduction in borrowing costs by the central bank soon, there is a risk of a more severe economic downturn.

Fed Chair Jay Powell has argued that inflation can return to the central bank’s 2 percent target without a recession.

He also mentioned that the central bank would act “if the labor market were to unexpectedly weaken or if inflation were to fall more rapidly than anticipated.”