The News
A key measure of US inflation — the Consumer Price Index — slowed in July to an annualized pace of 2.9%, the US Bureau of Labor Statistics reported Wednesday. This is the first time inflation has risen by less than 3% since 2021 and comes in lower than analysts’ estimates.
It’s the latest sign that inflation is cooling. Analysts had estimated a 3% rise, matching June, according to market research firm FactSet. In June, the CPI had fallen to a three-year low.
The new figures come as the US Federal Reserve prepares for its September meeting, when it is expected to cut interest rates for the first time since March 2020.
The Dow Jones Industrial Average and S&P 500 both ticked up by less than 1% following the report Wednesday, while the Nasdaq was about flat in afternoon trading.
After stocks plunged on Aug. 5 over fears of an incoming recession (before later rebounding), Wednesday’s inflation data reassured investors that a rate cut is imminent. However, it didn’t signal the kind of jumbo slice some Wall Street banks have demanded. More than half of economists expect the Fed to cut rates by a quarter of a percentage point at September’s meeting, according to CME Group’s FedWatch Tool.
SIGNALS
Powell’s data hunt may be over
In early July, Fed Chair Jerome Powell said the central bank would not cut rates until it saw more data showing that inflation was cooling. He didn’t clarify exactly how much data he was looking for, but some economists say Wednesday’s CPI report may have been enough. “Any Fed official waiting for a little more data to make the decision on whether to cut interest rates got it in spades this morning,” FwdBonds’ Christopher Rupkey wrote in a note on Wednesday, according to CNN. While there is still inflation in some product categories, including housing and car insurance, deflation in others like apparel and medical care balances it out, he said.
Sights set on the labor market
With inflation pressure easing, some analysts expect the Fed to turn its attention to the jobs market, CNBC reported. Last month’s GDP report showed that while unemployment remains low, employers aren’t opening up new positions at the same rate as before. July saw the second-lowest number of new jobs created in nearly four years, signaling “a significantly weaker job market” and raising questions as to whether the Fed has waited too long to make a rate cut. “If they don’t [cut rates] at the September meeting, the market is not going to take kindly to that,” Plante Moran Financial Advisors’ Jim Baird said.
‘Stubbornly sticky’ rent costs likely to remain into 2025
“The most disappointing aspect of this report was the shelter data,” Inflation Insights’ Omair Sharif wrote in a research note, Yahoo Finance reported. Rent costs rose by 0.4% in July — double that of June — and the cost of housing continues to be “stubbornly sticky,” even as costs are coming down elsewhere. Economists have long expected a slowdown in rising rents, but it has yet to materialize, and researchers at the Minneapolis Fed expect housing inflation to remain high into 2025. “The widespread expectation is inflation won’t come down all the way to normal until there’s major headway on the housing component,” The Washington Post reported.