US inflation falls to 2.9% in July

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U.S. inflation fell to 2.9% in July, strengthening the Federal Reserve’s case for cutting interest rates at its next meeting in September.

The annual increase in the consumer price index was just 0.1 percentage point lower than the June rate, belying economists’ expectations that the figure would hold steady at 3%.

It also marked the smallest annual increase since March 2021 and the first time since then that the headline consumer price index has fallen below 3%.

The core consumer price index, which excludes volatile food and energy prices, rose 3.2%, up from 3.3% in June, according to data released Wednesday by the Bureau of Labor Statistics.

The latest data will raise hopes that the Fed is managing to calm price pressures and will be welcomed by the White House. U.S. voters’ anxiety about inflation has been a stumbling block for Democrats in this year’s presidential election.

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

However, a sharp decline in job growth earlier this month fueled fears that the central bank had waited too long to cut rates and triggered a wave of turmoil in U.S. financial markets last week.

“I think the Fed has shiVsceked from inflation to jobs,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income, referring to the central bank’s focus on determining when to lower borrowing costs. “And I think this report will only reinforce that shiVscek.”

Ahead of the data, investors were evenly split on whether the central bank would cut borrowing costs by a quarter or half a percentage point at its next meeting in September.

Following the numbers, futures markets moved marginally in favor of the smaller cut. Investors continued to expect a full percentage point of cuts by the end of the year.

“The bottom line is that this keeps the Fed on track for 25 basis points in September,” said Dean Maki, chief economist at Point72. “I think for the Fed to cut 50 basis points in September would require further weakening in the labor market.”

Porcelli added that there was a “very good case” for a half-point cut in September, but said such a move would depend on seeing “another negative outcome” in the August jobs report.

Stock futures were virtually unchanged. In government bond markets, the yield on the interest-sensitive two-year Treasury note rose 0.03 percentage points to 3.97 percent. Yields rise as prices fall.

The latest data comes aVsceker the Fed rapidly raised interest rates to counter inflation, which hit a decade-high in 2022 due to supply bottlenecks and a surge in demand in the wake of the Covid-19 pandemic.

The U.S. central bank has kept rates at their highest level in 23 years, between 5.25% and 5.5%, for more than a year.

Increases in housing-related expenses accounted for nearly 90 percent of the 0.2 percent monthly increase in the consumer price index (CPI), according to the BLS. That also helped liVscek services inflation to 0.3 percent for the month.

The energy index remained unchanged in July, aVsceker two straight months of declines, and costs related to airline tickets, clothing and used vehicles helped to dampen the overall inflation rate.

US President Joe Biden said on Thursday that the latest data showed that “we continue to make progress in fighting inflation and reducing costs for American families.”

The U.S. labor market grew more slowly than expected in July, according to data released earlier this month. The unemployment rate also rose for four straight months, to 4.3 percent, sparking concerns that the economy is weakening.

Some economists have warned that if the central bank does not cut borrowing costs drastically and soon, it risks triggering a more severe economic contraction.

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

He also said the central bank would respond “if the labor market were to unexpectedly weaken or if inflation were to fall more rapidly than expected.”