U.S. Consumer Prices Rise Moderately in July; Annual Inflation Rate Falls Below 3%
Source: DairyNews.today
The U.S. consumer price index (CPI) saw a moderate increase in July, marking a significant milestone as the annual inflation rate fell below 3% for the first time since early 2021. This development has strengthened expectations that the Federal Reserve may reduce interest rates in its upcoming September meeting.
According to the Labor Department's report released on Wednesday, the CPI rose by 0.2% in July, consistent with economists' forecasts, following a 0.1% decline in June. The increase was largely driven by a 0.4% rise in shelter costs, which include rents and accounted for nearly 90% of the overall CPI increase. Food prices also edged up by 0.2%, mirroring June’s rise, while gasoline prices remained unchanged after two consecutive months of decline.
On a year-over-year basis, the CPI increased by 2.9% in July, down from a 3.0% rise in June. This marks the first time since March 2021 that annual consumer price growth has dipped below 3%, continuing a downward trend from the peak of 9.1% in June 2022. The moderation in inflation is a sign that higher borrowing costs are effectively curbing demand, moving inflation closer to the Federal Reserve’s 2% target.
The July inflation data has fueled market speculation about a potential rate cut by the Federal Reserve in September. Current market odds, as reflected by CME Group's FedWatch tool, suggest a 59% probability of a half-percentage-point reduction, with the remainder betting on a quarter-point cut. This sentiment is influenced by the recent uptick in the unemployment rate, which reached 4.3% in July—a near three-year high.
However, economists caution that a significant deterioration in the labor market would likely be necessary for the Fed to justify a 50-basis-point cut. The rise in the jobless rate has been attributed more to an increase in labor supply, partly due to immigration, rather than a surge in layoffs.
The Federal Reserve has kept its benchmark overnight interest rate in the 5.25%-5.50% range for over a year, following a series of aggressive rate hikes totaling 525 basis points across 2022 and 2023. Excluding the volatile food and energy sectors, the core CPI also rose by 0.2% in July, after a 0.1% increase in June. Over the past 12 months, the core CPI grew by 3.2%, the smallest year-on-year gain since April 2021.
Jeffrey Roach, Chief Economist at LPL Financial, noted, "Barring any unforeseen global economic shocks, the Fed is likely to implement a quarter-point rate cut in September. While the probability of a half-point cut remains elevated, it reflects ongoing investor caution following recent economic developments."
The moderation in inflation, coupled with the Fed's cautious approach, suggests that the U.S. central bank is navigating a delicate balance between curbing inflation and supporting a labor market facing potential challenges.
On a year-over-year basis, the CPI increased by 2.9% in July, down from a 3.0% rise in June. This marks the first time since March 2021 that annual consumer price growth has dipped below 3%, continuing a downward trend from the peak of 9.1% in June 2022. The moderation in inflation is a sign that higher borrowing costs are effectively curbing demand, moving inflation closer to the Federal Reserve’s 2% target.
The July inflation data has fueled market speculation about a potential rate cut by the Federal Reserve in September. Current market odds, as reflected by CME Group's FedWatch tool, suggest a 59% probability of a half-percentage-point reduction, with the remainder betting on a quarter-point cut. This sentiment is influenced by the recent uptick in the unemployment rate, which reached 4.3% in July—a near three-year high.
However, economists caution that a significant deterioration in the labor market would likely be necessary for the Fed to justify a 50-basis-point cut. The rise in the jobless rate has been attributed more to an increase in labor supply, partly due to immigration, rather than a surge in layoffs.
The Federal Reserve has kept its benchmark overnight interest rate in the 5.25%-5.50% range for over a year, following a series of aggressive rate hikes totaling 525 basis points across 2022 and 2023. Excluding the volatile food and energy sectors, the core CPI also rose by 0.2% in July, after a 0.1% increase in June. Over the past 12 months, the core CPI grew by 3.2%, the smallest year-on-year gain since April 2021.
Jeffrey Roach, Chief Economist at LPL Financial, noted, "Barring any unforeseen global economic shocks, the Fed is likely to implement a quarter-point rate cut in September. While the probability of a half-point cut remains elevated, it reflects ongoing investor caution following recent economic developments."
The moderation in inflation, coupled with the Fed's cautious approach, suggests that the U.S. central bank is navigating a delicate balance between curbing inflation and supporting a labor market facing potential challenges.
