The annual U.S. inflation rate fell below 3% in July for the first time since 2021, with fears subsiding on Wall Street on signs of a cooling labor market and expectations that the Federal Reserve will cut interest rates next month. This was a source of reassurance for investors. .
Prices rose at an annual rate of 2.9% in July, but core inflation, which excludes the volatile food and energy industries, rose 3.2% over the past 12 months and rose 0.2% since June.
The latest figures for the Consumer Price Index (CPI), which measures the prices of consumer goods and services, were released as political battles over the U.S. economy intensify. A recent poll shows Democratic presidential candidate Kamala Harris has pulled ahead of her Republican rival Donald Trump when it comes to who voters trust with the economy. The poll is a marked change from many polls that show the former president ahead of Joe Biden on economic issues.
Paul Ashworth, chief North American economist at Capital Economics, said the report was “a bit disappointing,” pointing out that rent prices, a major driver of inflation, were higher in July than in June. ” he said.
But overall, he said the report “can best be described as mildly encouraging,” and while it should support a quarter-point rate cut at the Fed’s September meeting, “at the same time, it also “I’m not suggesting that it’s collapsing in some sense.” That could justify an even larger 50bp (basis point) cut. ”
While the latest reports are unlikely to shake up the market, uncertainty remains on Wall Street after last week’s sell-off in stocks sent panic among investors.
Investors viewed the report as one of the key indicators of whether the Fed will start cutting interest rates next month. With interest rates at 5.25% to 5.5%, the highest in 20 years, for more than a year, it is unclear whether the Fed will be able to achieve a so-called “soft landing” in curbing price increases without triggering a recession.
For much of last year, the Fed appeared to have achieved a soft landing. Inflation fell slowly, peaking at 9.1% in June 2022, but the labor market remained stable. When the Fed announced at the end of July that interest rates would remain unchanged, the inflation rate in June was 3%, down 0.3% from the previous month, and the unemployment rate was 4.1%.
However, with the July jobs report released just a week later, optimism for a soft landing faded, with employment slowing to a much lower than expected level and the unemployment rate at its highest level since October 2021. This rose to 4.3%.
The market immediately panicked, leading to a massive stock sell-off on August 5th, and by the end of the day, the S&P, Dow Jones, and Nasdaq were all down 2.6%, as the U.S. economy entered recession. There was growing concern that there might be.
At least for now, those fears have proven premature. By Thursday, the market had rebounded after weekly reports showed a decline in jobless claims. This shows that despite Wall Street’s concerns, there is still some strength in the labor market. The S&P 500 ended up rising 2.3% in one day, its biggest gain since November 2022.
Investors and economists expect the Fed to cut interest rates at its next meeting on September 18th. Still, some Fed officials have indicated they are tired of the need to cut rates.
“Inflation remains uncomfortably above the committee’s 2% target,” Fed Director Michelle Bowman said in a public appearance last week. “We will continue to take a cautious approach as we consider adjustments to our current policy stance.”
For the Fed, it’s essentially a balance between rising prices and the job market. In a recent statement, the Fed said it was “mindful of the risks to both sides of the dual mandate.”
At the Fed’s last meeting, Chairman Jerome Powell said officials were no longer focused on inflation.
“Given the progress we’ve made, we don’t think we need to focus 100% on inflation,” Powell said.
