U.S. Inflation Drops Below 3%, Boosting Hopes of an Interest Rate Cut

• US inflation slowed to 2.9% in July, the lowest level since March 2021, and below the expected 3%.
• Core inflation, excluding volatile food and energy prices, also decreased to 3.2%, its lowest point since April 2021.
• Shelter costs remain a primary driver of inflation, while energy and gasoline prices stabilized in July.
• The July inflation report strengthens the case for a Fed rate cut in September, with markets anticipating a 1% cut by the end of the year.

US inflation reached its lowest since March 2021 in July, coming in at just 2.9 percent and further strengthening the case for an interest rate cut from the Federal Reserve.

Analysts had expected US inflation in July to come in at three percent, unchanged from where it had fallen to in June.

While this is still above the Fed’s two percent target, it represents a significant fall from the highs of 9.1 percent just two years earlier.

Core inflation, or inflation without volatile components like food and energy, reached 3.2 percent, its lowest level since April 2021 and where analysts had expected.

Price pressures came mainly from the cost of shelter, which rose 0.4 percent between June and July and 5.1 percent over the last year. The price of rent rose even faster, increasing 0.5 percent over the month.

The increase in shelter prices now accounts for over 70 percent of the price increases for core inflation and has been a persistent problem for the Fed to bring down.

Meanwhile, the price of energy and gasoline were both unchanged between June and July, with the former having increased 1.1 percent over the last year.

“The July US CPI report further helps to cement a September Fed cut, though after July’s softer-than-expected jobs data, it is the labour market, not inflation, that is likely to determine both the magnitude of such a move, as well as the scale, and speed, of further steps towards normalising policy,” said Michael Brown, senior research strategist at Pepperstone.

Markets are currently evenly split as to whether the Fed will cut interest rates at their September meeting by 0.25 percent or 0.5 percent, according to data from CME Group.

“A September cut had already been strongly hinted at by Chair Powell in the July press conference and became an effective certainty after the July jobs report,” explained Brown.

By the end of the year, markets are expecting around a one percent cut over the three meetings the central bank has left.

By City AM

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