U.S. Inflation Edges Closer to Fed’s Target
Inflation in the United States slowed to 2.9% year-on-year in July, down from 3% the previous month, marking its lowest level since March 2021, according to the CPI index released on Wednesday. This figure brings inflation closer to the Federal Reserve's 2% target.
Good news for American consumers: prices continued to decelerate in July, with a 2.9% year-on-year increase, compared to 3% in June, based on the CPI index released Wednesday. This is the lowest annual level recorded since March 2021. The Labor Department's data even came in slightly below market expectations, which had anticipated a stable inflation rate of 3%, according to a MarketWatch consensus.
In a statement, President Joe Biden welcomed the “progress” in the fight against inflation, stating, “We still have work to do to lower costs for American workers, but we are making real progress, with wages rising faster than prices over the last 17 months.”
Despite these results, the New York Stock Exchange opened with only modest gains on Wednesday. After a strong session the previous day, the Dow Jones edged up by 0.02%, the tech-heavy Nasdaq rose by 0.31%, and the S&P 500 gained 0.19% in early trading.
According to Labor Department data, prices on a monthly basis rose by 0.2% in July, after a 0.1% decline in June, in line with analysts’ expectations. Excluding the more volatile food and energy prices, core inflation stood at 3.2% year-on-year, also meeting expectations and slightly down from 3.3% the previous month.
Goods prices were the main driver of the slowdown, particularly due to a drop in prices for new and used vehicles and, to a lesser extent, apparel and fuel. However, the prices of services excluding energy, which have been the primary contributors to inflation in recent months, increased by 0.3% month-on-month, compared to 0.1% in June, with a notable rise in housing and transportation services.
Toward the 2% Target
This marks the third consecutive month of declining inflation, after an uptick in April, and is a key indicator for markets that inflation is trending back toward the Federal Reserve's 2% target. However, the Fed primarily uses another index, the PCE, to guide its monetary policy.
It's worth noting that U.S. inflation peaked in the wake of the global economic reopening after the COVID-19 pandemic, reaching as high as 9.5% year-on-year in June 2022. The Fed responded by aggressively raising interest rates, bringing them to a range of 5.25% to 5.50%, the highest level since the early 2000s.
Inflation has since slowed significantly, averaging around 2.6% in recent months, according to the PCE index. However, after a rapid decline in the second half of 2023, inflation has stabilized between 2.5% and 3% since the start of this year.
A Rate Cut in September?
While U.S. inflation seems to be on the decline, the Fed has so far refrained from cutting rates, asserting that the phase of rate hikes is over.
“The progress made in May and June in terms of slowing inflation is good news. But inflation remains too high above the 2% target,” said Michelle Bowman, a member of the Federal Reserve’s Board of Governors, at a conference in Colorado Springs last week.
Federal Reserve Chair Jerome Powell recently stated that it would be unwise to wait for inflation to return to 2% before taking action on rates, stressing, “That would be too late.”
These comments have bolstered market confidence in the likelihood of a rate cut in the upcoming meetings: more than 75% of analysts anticipate a reduction in mid-September, according to the CME FedWatch tool. This would mark the first rate cut before the Fed’s final meeting scheduled before the U.S. presidential election on November 5.
The inflation data released on Wednesday adds to the optimism. “While housing price increases appear persistent, with disinflation in other areas, the Fed is cleared to reduce rates by 25 basis points at its next meeting,” said Ryan Sweet, Chief Economist at Oxford Economics, in a note.
“With most of the results in line with expectations, investors should feel more confident about a rate cut in September. However, the question is no longer ‘if’ or ‘when’ the Fed will cut rates, but whether it will be by 25 or 50 basis points,” notes Bret Kenwell, a U.S. market analyst at eToro
إرسال تعليق