American inflation dropped to 2.9% in July, lending weight to the argument for the Federal Reserve to decrease interest rates at its upcoming meeting in September. The yearly increase in the consumer price index fell just below June’s rate by 0.1 percentage points, going against economists’ predictions that it would remain at 3%. This is the first time that CPI has dipped below 3% since March of 2021. Furthermore, core CPI, which doesn’t count fluctuating food and energy prices, grew by 3.2%, down slightly from 3.3% in June, according to statistics released by the Bureau of Labor Statistics on Wednesday.
This fresh data is likely to inspire optimism that the Fed is successfully reducing price pressures. This will be well-received by the White House. Concerns surrounding inflation have indeed posed a challenge for the Democrats in the current presidential election campaign.
David Kelly, JPMorgan Asset Management’s chief global strategist, hailed the data as uplifting. He said it should provide the Fed with “renewed confidence” that price pressures were trending towards its 2% goal. The officials at the Fed have been waiting for more proof of a lasting deflation before decreasing the cost of borrowing. This comes as a result of indications that Americans are curtailing their expenditures.
However, a significant downturn in employment growth earlier in the month has stoked apprehensions that the central bank may have waited too long to lessen interest rates and this triggered a wave of instability across the American financial markets the previous week.
In the words of Tom Porcelli, PGIM Fixed Income’s chief US economist, “I think the Fed has transitioned from focusing on inflation to focusing on employment.” He believes that this report will only upscale this shift. Furthermore, Kelly noted that the job statistics for August, due to be announced in early September, will be of paramount importance this year.
Investors were divided equally on whether the central bank would impose a quarter-point or half-point reduction in borrowing costs in its meeting scheduled for September, prior to the data revelation.
After the release of recent statistics, there was a slight shift in futures markets in support of a minor reduction. The investment community is still of the thought that a complete one percent interest rate cut will happen by year-end.
“The crux of the matter is that this keeps the Federal Reserve on the path to a reduction of 25 basis points in September,” stated Dean Maki, chief economist at Point72. “I believe a further decline in the employment market is necessary for the Fed to implement a 50 basis point rate cut in September.”
In the wake of the morning bell in New York, US stocks saw a modest uptick, with the primary S&P 500 index growing by 0.2 percent and the tech-centred Nasdaq Composite increasing by 0.4 percent.
In state bond markets, the interest rate-susceptible two-year Treasury yield surged by 0.04 percentage points to 3.98 percent. Yields augment alongside falling prices.
The most recent figures emerged in the wake of the Fed swiftly escalating interest rates in an effort to combat inflation that soared to unrivalled heights in decades in 2022, due to supply chain disruption and overwhelming demand in the aftermath of the Covid-19 pandemic.
The American central bank has preserved rates at a historical peak of 5.25 to 5.5 percent for over twelve months.
Rise in housing-related expenditures made up close to 90 percent of the 0.2 percent monthly CPI surge, as reported by the BLS. This also served to escalate services inflation to 0.3 percent for the month.
US President Joe Biden remarked on Thursday that the latest numbers demonstrate “we continue to make strides in battling inflation and diminishing expenses for American homes”.
Data published earlier in the month indicates that the US jobs market expanded at a slower rate than anticipated in July. Unemployment rates have also witnessed an uptick for the fourth consecutive month to reach 4.3 percent, sparking concerns over the weakening state of the economy.
Certain economists have raised concerns that if the central bank doesn’t considerably decrease borrowing expenses soon, it may precipitate a more drastic economic downturn. – Copyright The Financial Times.