The U.S. Department of Labor released a report on Wednesday (August 14) showing that the Consumer Price Index (CPI) for July increased by 0.2% compared to the previous month and rose by 2.9% year-on-year. These encouraging figures have heightened the possibility of a rate cut by the Federal Reserve in September.
According to the Labor Department report, the year-on-year growth in CPI for July was 2.9%, slightly lower than the 3% in June, marking the lowest level since March 2021. The CPI is closely monitored by the Federal Reserve. Economists surveyed by Dow Jones had forecast a 0.2% month-on-month increase and a 3% year-on-year increase in July.
Excluding the more volatile food and energy prices, the core CPI for July increased by 0.2% month-on-month and by 3.2% year-on-year, the latter marking the lowest level since April 2021.
The food index for July rose by 0.2% compared to the previous month and by 2.2% year-on-year; the energy index remained unchanged from June but increased by 1.1% year-on-year; gasoline prices remained flat from June but decreased by 2.2% year-on-year.
Housing-related data has been a key issue for the Federal Reserve in addressing inflation, as it holds a significant weightage in the CPI. The Labor Department report indicated that housing costs in July increased by 0.4% month-on-month and by 5.1% year-on-year, contributing to the overall inflation record.
Although the overall inflation data for July still falls short of the Federal Reserve’s 2% target, these figures have brought positive signals to the market and laid the groundwork for a rate cut decision by the Federal Reserve at the meeting on September 17 and 18.
With the easing of inflation, concerns about a slowdown in the labor market have increased the likelihood of a rate cut by the Federal Reserve.
CNBC reported that Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, mentioned in reference to the CPI report that while there was a decline overall, certain areas remain stagnant.
“We must closely monitor inflation data and employment data,” Sonders said.
According to Bloomberg, Brian Coulton, Chief Economist at Fitch Ratings, believes that the new inflation data indicates that the Federal Reserve is almost certain to cut rates in September.
“From a broader perspective, core inflation has now dropped to 2.3% (three-month year-on-year growth rate),” Coulton said. “In the past few months, the Federal Reserve has regained confidence in cutting rates, and this data will strengthen that confidence, helping to push for a rate cut in September.”
Paul Ashworth, Chief North American Economist at Capital Economics, stated that the July CPI report provided mild encouragement for the Federal Reserve. It supports a 25-basis point rate cut in September while not indicating that U.S. price pressures are collapsing to the extent that would compel the Federal Reserve to cut rates by a larger 50 basis points.