US annual inflation rate dipped below 3% in July for the first time since 2021, a relief to investors who are expecting the Federal Reserve to cut interest rates next month as a sense of unease has settled over Wall Street after signs of a cooling labor market.
Prices rose at an annual rate of 2.9% in July while core inflation, which does not account for the volatile food and energy industries, climbed 3.2% over the previous 12 months and 0.2% since June.
The latest reading of the the Consumer Price Index (CPI), which tracks prices of consumer goods and services, comes as the political battle over the US economy is heating up. A recent poll showed the Democratic presidential candidate, Kamala Harris, had pulled ahead of her Republican rival, Donald Trump, on who voters trust with the economy. The poll was a marked shift from the many polls that have shown the former president ahead of Joe Biden on economic issues.
Paul Ashworth, chief North America economist at Capital Economics, said the details of the report were “a little disappointing” noting that rent prices, which have been a big driver of inflation, were higher in July than June.
But overall he said the report was “best described as mildly encouraging” and should support a quarter-point cut in interest rates when the Fed meet in September but, “at the same time, doesn’t suggest price pressures are collapsing in a way that could warrant a bigger 50bp [basis point] reduction”.
Though the recent report is unlikely to shake markets, uncertainty remains in Wall Street after last week’s sell-off sowed panic among investors.
Investors considered this report one of the main indicators for whether the Fed will start cutting interest rates next month. Interest rates have been at 5.25% to 5.5%, a two-decade high, for more than a year, and it is unclear whether the Fed can achieve a so-called “soft landing” – slowing price increases without inciting a recession.
For much of the last year, it seemed like the Fed had achieved a soft landing. The rate of inflation was slowly declining – it peaked at 9.1% in June 2022 – while the labor market held steady. When the Fed announced it would not change interest rates at the end of July, inflation in June was 3%, a 0.3% decrease from the month before, while unemployment was at 4.1%.
But any rosy outlook for a soft landing was diminished just over a week later, when July’s job figures were released, showing that hiring slowed to a level much lower than expected, and the unemployment rate rose to 4.3%, the highest since October 2021.