The Consumer Price Index cooled in July compared to the previous year, providing more evidence that inflation is moderating and likely prompting the Federal Reserve (Fed) to cut interest rates at its meeting in September.
The overall inflation rate was 2.9% in July on a year-over-year basis, the Bureau of Labor Statistics reported, slightly down from 3% in June. The number was softer than economists expected and marked the first time inflation fell below 3% since 2021.
Although inflation still exceeds the normal 2% rate before the coronavirus pandemic, it is much slower than the peak of 9.1% in 2022.
Investors viewed this report as a key indicator of whether the Fed will begin cutting interest rates next month. Interest rates have been at 5.25% to 5.5% for over a year, and it is unclear whether the Fed will achieve what economists call a “soft landing” – slowing price increases without triggering a recession.
For much of last year, it seemed the Fed had achieved a soft landing. The inflation rate was slowly decreasing – peaking at 9.1% in June 2022 – while the labor market remained stable. When the Fed announced it would not change interest rates at the end of July, inflation in June was 3%, a drop of 0.3% from the previous month, while unemployment was at 4.1%.
But any optimistic outlook for a soft landing was diminished just over a week later when July’s job numbers were released, showing that hiring had slowed to a much lower level than expected, and the unemployment rate rose to 4.3%, the highest since October 2021.
Markets quickly panicked, leading to a massive sell-off on August 5 that saw the S&P, Dow Jones, and Nasdaq drop 2.6% by the end of the day, increasing fears that the U.S. economy was entering a recession.
These fears proved premature, at least for now. On Thursday (8), markets rebounded after a weekly report showed a decline in unemployment claims – a sign that there is still some strength in the labor market, despite Wall Street’s fears. The S&P 500 ended up rising 2.3% in a day, its biggest jump since November 2022.
Investors and economists expect the Fed to cut rates at its next meeting on September 18.
Source: The New York Times and The Guardian