US consumer price index hits lowest level since March 2021

18, Aug - NEWS

US inflation has again shown signs of slowing. The Consumer Price Index (CPI) rose 2.9% year-on-year in July, down one-tenth of a percentage point from the previous month, according to the US Bureau of Labour Statistics (BLS). The figure was the lowest since March 2021, indicating some easing of price pressures in the US economy. This dynamic reinforces expectations that the Federal Reserve (Fed) may soon start cutting interest rates.

Prices rose 2.9% in July 2024 compared to July 2023. Over the month, the US consumer price index increased by one-tenth of a percentage point, while a 0.1% decline was recorded in June. Such growth was in line with experts' forecasts. The core CPI in July was 3.2% year-on-year, which was in line with market expectations and one-tenth of a percentage point lower than in June, reaching the lowest level since April 2021. However, the monthly comparison was slightly less optimistic, with the core index rising 0.2%, compared with expectations for a rise of just one-tenth of a percentage point.

US inflation shows that despite the Fed's efforts, significant challenges in the economy remain. Core inflation, which excludes more volatile energy and food prices, is also showing growth. Those prices rose 1.1% and 2.2% year-over-year in July, respectively. According to the BLS, housing, car insurance, furniture, home services, education, leisure and personal care rose in price in the U.S. last month. At the same time, prices for used cars, health care, airline tickets and clothing fell, which somewhat softened the overall inflation picture.

What does this data mean for the Fed?

U.S. interest rates have remained at high levels for more than a year. The Fed has kept them in the 5.25-5.50% range for the past 13 months to curb inflation and meet the 2% target. The decline in the CPI index to its lowest level in three and a half years indicates that tight monetary policy is starting to pay off. Many analysts believe the Fed may soon move to ease its policy. ‘The CPI index gives the Fed a reason to cut rates,’ Bankinter analysts said in their commentary following the release of the BLS data.

‘Investors should be more confident about a rate cut in September,’ agrees Bret Kenwell, investment analyst at brokerage eToro. ‘However,’ Kenwell adds, ’the question is no longer whether the Fed will cut rates, but by 25 or 50 basis points. The Federal Open Market Committee (FOMC), the Fed's body that decides on the price of money, is scheduled to meet three times before the end of the year. Each will last two days: the next will be held on 17-18 September, followed by 6-7 November and the last one this year on 17-18 December.

When the Fed raises or lowers interest rates, it usually does so in quarter-point (or 25 basis point) increments. Until earlier this month, it was assumed that it would do so once the period of rate cuts began, but the latest labour market data has disrupted market expectations. Bret Kenwell (eToro): ‘Even if today's data came in slightly better than expected, the Fed could justify a rate cut next month.’

Unexpected rise in US unemployment changes the Fed's focus

In addition to keeping inflation in check, the Fed's job is to ensure full employment in the US. That's why the unexpected rise in the unemployment rate in July took experts by surprise and led many to speculate that the first rate cut would be 50 basis points (or half a point). Indeed, the rise in unemployment on the other side of the Atlantic eventually triggered a wave of panic in markets around the world.

All of this explains why the reaction to the CPI index in markets was generally muted on Wednesday. ‘The Fed is now prioritising jobs data over inflation data,’ said Krishna Guha, vice president at Evercore ISI, according to Bloomberg. ‘The Fed is emphasising that its policy is based on a body of data, not a single data point. Even if today's numbers came in slightly above expectations, the Fed could justify a rate cut next month,’ said Bret Kenwell.

Ryan Sweet, chief U.S. economist at Oxford Economics, agrees with him: ‘The bar is high for a single inflation report to cause the Fed to back away from cutting interest rates in September, as the central bank considers the risks on both sides of its dual mandate.’ News that the U.S. producer price index (PPI), or wholesale inflation rate, fell a tenth of a point more than expected in the seventh month of the year cheered U.S. stocks.