US inflation falls to 2.9% in July

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Inflation in the US fell to 2.9 percent in July, underpinning the US Federal Reserve’s arguments for cutting interest rates at its next meeting in September.

The annual increase in the consumer price index was only 0.1 percentage point below the June rate, beating economists’ expectations that the figure would remain stable at 3 percent.

It was also the first time since March 2021 that the headline CPI fell below 3 percent.

The core CPI, which excludes volatile food and energy prices, rose 3.2 percent, compared with 3.3 percent in June, according to data from the Bureau of Labor Statistics released Wednesday.

The latest figures raise hopes that the Fed will succeed in containing price pressures and are well received in the White House. US voters’ concerns about inflation are a headwind for the Democrats in this year’s presidential election campaign.

“Overall, I think [the data] encouraging,” said David Kelly, chief global asset management strategist at JPMorgan, adding that this should give the Fed “further confidence” that price pressures are moving toward its 2 percent target.

Given the signs of Americans curtailing consumption, Fed officials have been looking for further evidence of a sustained slowdown in inflation before lowering borrowing costs.

But a sharp decline in employment growth earlier this month fueled concerns that the Federal Reserve had waited too long to cut interest rates and sparked turmoil in U.S. financial markets last week.

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

Kelly added that the August jobs report, to be released in early September, “will be the most important of the year.”

Before the data was released, investors were divided over whether the central bank would cut borrowing costs by a quarter or half a percentage point at its next meeting in September.

After the figures were announced, the futures markets trended slightly in favor of the smaller cut. Investors continued to expect a cut of a full percentage point by the end of the year.

“The bottom line is that the Fed remains on track for a 25 basis point cut in September,” said Dean Maki, chief economist at Point72. “I think a further weakening of the labor market would be needed for the Fed to cut rates by 50 basis points in September.”

US stocks rose slightly after trading began in New York, with the leading S&P 500 index up 0.2 percent and the technology-heavy Nasdaq Composite up 0.4 percent.

In government bond markets, the interest-sensitive yield on two-year US Treasury bonds rose 0.04 percentage points to 3.98 percent. Yields rise when prices fall.

The latest data comes after the Fed quickly raised interest rates to combat inflation, which hit a multi-decade high in 2022 due to supply shortages and a surge in demand resulting from the Covid-19 pandemic.

The US Federal Reserve has kept its key interest rate at a 23-year high of 5.25 to 5.5 percent for over a year.

According to the BLS, rising housing costs accounted for nearly 90 percent of the 0.2 percent monthly increase in the consumer price index. This also helped push services inflation up to 0.3 percent for the month.

The energy index remained unchanged in July after declining for two consecutive months. Costs for flights, clothing and used cars helped to dampen the overall inflation rate.

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

The US labor market grew more slowly than expected in July, according to data released earlier this month. The unemployment rate also rose for four consecutive months to 4.3 percent, raising fears that the economy is weakening.

Some economists warn that if the central bank does not significantly reduce borrowing costs soon, it risks an even more severe economic downturn.

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

He also said the central bank would react “if the labor market weakens unexpectedly or inflation falls faster than expected.”