US inflation falls to 2.9% in July

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US inflation fell to 2.9 per cent in July, bolstering the case for the Federal Reserve to cut interest rates at its meeting in September.

The annual rise in the consumer price index was just 0.1 percentage points below June’s rate and undercut economists’ expectations that the figure would hold steady at 3 per cent.

It also marked the smallest annual increase since March 2021 and the first time since then that the headline CPI figure has dipped below 3 per cent.

Core CPI, which excludes volatile food and energy prices, rose by 3.2 per cent, compared with 3.3 per cent in June, according to data published by the Bureau of Labor Statistics on Wednesday.

The latest data will raise hopes that the Fed is succeeding in quelling price pressures and will be welcomed in the White House. US voter disquiet about inflation has been a headwind for Democrats in this year’s presidential election campaign.

Fed officials have sought more evidence that inflation is cooling sustainably before lowering borrowing costs as Americans show signs of reining in their spending.

The Fed rapidly ratcheted up interest rates to fight inflation that hit multi-decade highs in 2022 due to supply bottlenecks and a surge in demand following the Covid-19 pandemic.

The US central bank has held rates at a 23-year high of 5.25-5.5 per cent for more than a year.

Increases in housing-related expenses accounted for nearly 90 per cent of the 0.2 per cent monthly increase for CPI, according to the BLS.

The energy index was unchanged in July, following two consecutive months of declines, and costs related to airfare, apparel and used vehicles helped to damp the overall inflation rate.

Fed officials will next meet in mid-September, when they are expected to cut borrowing rates for the first time since the onset of the pandemic in March 2020.

Before the data release, investors were evenly split over whether the central bank would deliver a quarter-point or half-point reduction in borrowing costs at that meeting.

Following the figures, futures markets moved marginally in favour of the smaller cut. Investors continued to expect a full percentage point of cuts by the end of the year.

“The bottom line is this keeps the Fed on track for 25 basis points in September,” said Dean Maki, chief economist at Point72. “I think that for the Fed to cut by 50 basis points in September would require a further weakening in the labour market.” 

Stock futures were little changed. In government bond markets, the interest rate-sensitive two-year Treasury yield rose 0.03 percentage points to 3.97 per cent. Yields rise as prices fall.

According to data released earlier this month, the US jobs market grew more slowly than expected in July. The unemployment rate also has risen for four straight months, to 4.3 per cent, sparking fears that the economy is weakening.

The sharper pullback in jobs growth fanned fears that the Fed has waited too long to cut rates, and sparked a bout of turmoil across US financial markets last week.

Some economists have warned that unless the central bank cuts borrowing costs sharply soon, it risks triggering a more severe economic contraction.

Fed chair Jay Powell has argued that inflation can return to the central bank’s 2 per cent target without a recession.

He has also said the central bank would respond “if the labour market were to weaken unexpectedly or inflation were to fall more quickly than anticipated”.