The latest US inflation data has surpassed expectations, potentially paving the way for the Federal Reserve to consider interest rate cuts as early as September. According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) unexpectedly fell by 0.1% in June, bringing the annual inflation rate down to 3% from 3.3% in May. This marks the lowest annual increase in over three years and the first monthly decrease since May 2020.The core CPI, which excludes volatile food and energy prices and is closely watched by the Federal Reserve, rose by 0.1% monthly and 3.3% annually, also below market expectations. This moderation in inflation is largely attributed to a 3.8% drop in gasoline prices, offsetting increases in housing costs.The unexpected cooling of inflation has significantly increased market expectations for Federal Reserve interest rate cuts. The probability of a rate cut in September has risen to between 70% and 85%, according to various market monitors. Fed Chair Jerome Powell, while acknowledging the improving inflation trend, remains cautious about declaring victory over inflation. In recent Congressional testimony, Powell emphasized that the Fed needs ‘more good data’ before initiating monetary easing.Financial markets reacted positively to the inflation news. Major US stock indices, including the S&P 500 and Nasdaq, saw gains in pre-market trading. The US dollar fell to its lowest level in two months, while the 10-year Treasury yield dropped by 10 basis points to 4.18%.Despite the encouraging inflation data, some economists caution that the Federal Reserve may not rush into rate cuts. Kathy Bostjancic, chief economist at Nationwide, suggests that while the new inflation report supports their view of potential rate cuts starting in September, the Fed might proceed cautiously, potentially lowering rates by 50 basis points by year-end.The inflation slowdown, coupled with recent signs of cooling in the job market, suggests that the Fed’s aggressive rate hikes over the past year are having their intended effect. However, the costs of essential items such as food, rent, and healthcare remain higher than pre-pandemic levels, which could pose challenges for consumers and potentially impact political dynamics.
Key points
- US Consumer Price Index unexpectedly fell 0.
- Core inflation rose 3.
- Market expectations for a Federal Reserve rate cut in September have increased significantly.
- Financial markets reacted positively, with stock indices rising and Treasury yields falling.
1% in June, with annual inflation rate slowing to 3%.
3% annually, the smallest increase since April 2021.
Contradictions👾While most sources indicate increased expectations for a September rate cut, some economists caution that the Federal Reserve may still proceed cautiously.
