U.S. consumer prices rose at their slowest pace in over three years in July, increasing the likelihood of the Federal Reserve cutting interest rates. Inflation climbed 2.9 percent year-over-year, down from 3 percent in June, marking the smallest annual increase since March 2021.
This report comes after a weaker-than-expected jobs report in July, which fueled stock market volatility and recession concerns. Analysts believe the inflation data will convince the Federal Reserve that its high borrowing costs are effectively curbing inflation, despite recent increases in housing and food prices.
The Federal Reserve has maintained its key lending rate at 5.3 percent since July 2023, the highest level in two decades. This has resulted in higher interest rates for mortgages, credit cards, and other loans. The Fed aims to curb borrowing and reduce demand pressures that contributed to rising prices.
However, with inflation approaching the Fed’s 2 percent target, driven by lower oil prices and easing supply chain disruptions, pressure is mounting for rate cuts. The three major U.S. stock indexes remained relatively unchanged following the report.
Julian Howard, chief multi-asset investment strategist at GAM Investments, believes a September rate cut is “all but certain.” However, he expects the Fed to remain cautious, citing the recent uptick in inflation in the U.K., where the Bank of England recently cut rates.
Inflation in the U.S. has significantly decreased since June 2022, when it reached 9.1 percent. Prices for appliances, cars, airline tickets, and furniture have declined. Petrol prices have dropped 2.2 percent.
However, rising grocery prices have put pressure on the White House, particularly during a presidential election year. Housing costs have driven over 70 percent of inflation in the past year, with rent increases exceeding 5 percent. Grocery prices rose 1.1 percent, while car insurance soared over 18 percent.
President Joe Biden highlighted the report’s indication of progress in fighting inflation, while the Trump campaign focused on the 20 percent price increase since 2021.
Wall Street remains divided on the extent of the Fed’s September rate cut, with some analysts advocating for a more aggressive reduction. Wells Fargo economists believe the Fed will act quickly, citing the continued slowdown in inflation, rising unemployment, and weakening labor market indicators.
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