Stable US inflation in July fuels rate cut prospects

Washington. Inflation in the United States remained stable at 2.5 percent in July over the 12 months, and there is growing prospect that the Federal Reserve will cut interest rates in mid-September.

PCE inflation, the Fed’s preferred index, nevertheless posted a rebound on a month-over-month basis between June and July, rising to 0.2 percent from 0.1 percent between May and June.

This development is in line with analysts’ expectations.

In one year, “goods prices fell less than 0.1 percent and services prices rose 3.7 percent,” the Commerce Department said.

Core inflation, which excludes the most volatile prices such as food and energy, remained stable in both the 12-month and monthly comparisons, respectively at 2.6 percent and 0.2 percent.

Another measure of inflation, the CPI consumer price index, showed earlier this August that price increases were moderating in the world’s largest economy, to 2.9 percent in the year to July. That is the lowest since March 2021. In June, the CPI was 3 percent.

In July, consumer spending increased more than in June, 0.3 percent versus 0.2, as did their income (0.3 versus 0.1), the official report indicated.

“Today’s report shows we are actually making progress with inflation falling to 2.5 percent, its lowest level in three years,” President Joe Biden said in a statement.

It’s time

The decline in annual inflation over the past several months should convince the US central bank to begin lowering interest rates at its next meeting on 17 and 18 September.

The Fed raised rates to levels not seen in more than two decades, to make credit more expensive and thus discourage consumption and investment after the pandemic, as a way to moderate pressures on prices.

“The time has come for a monetary policy adjustment” and a reduction in interest rates, said Fed Chairman Jerome Powell last Friday during the annual meeting of global central bankers in Jackson Hole, Wyoming.

It is “hard” to imagine the Fed not lowering rates by mid-September, San Francisco Fed President Mary Daly said Monday.

“We do not want to find ourselves in a situation where we maintain an overly restrictive policy in a slowing economy,” he stressed.

The Fed is seeking to keep inflation at 2 percent annually, a level considered healthy for the economy.

Currently, reference rates are in a range of 5.25-5.50 percent.

“The economic fundamentals point to sustained disinflation,” EY chief economist Gregori Daco summed up in a recent note. “Unless labor conditions deteriorate in the coming weeks, we expect the majority (of Fed members) to support a 25 basis point (interest rate) cut in September,” he added.

The Fed noted that the unemployment rate rose to 4.3 percent in July.

Wall Street reacted positively to the inflation data and remained on the rise mid-session, ahead of the US holiday on Monday.