U.S. July CPI Up 2.9%: Growing Expectations for September Rate Cut

On August 14, the U.S. Department of Labor announced that the Consumer Price Index (CPI) for July rose by 2.9% compared to the same month last year

The U.S. Consumer Price Index (CPI) rose by 2.9% year-on-year in July, marking a significant drop to the 2% range for the first time in 40 months. This decline has sparked increasing expectations for a potential interest rate cut by the Federal Reserve in September. This blog post explores the recent CPI data, its implications for monetary policy, and what experts are predicting for the upcoming Federal Open Market Committee (FOMC) meeting.

On August 14, the U.S. Department of Labor announced that the Consumer Price Index (CPI) for July rose by 2.9% compared to the same month last year. This increase is lower than the market forecast of 3.0% and also represents a slowdown from the 3.0% rise recorded in June. It is the first time the U.S. CPI has dipped into the 2% range since March 2021, marking a 40-month low.

Excluding energy and food, the core CPI increased by 3.2% year-on-year and rose by 0.2% month-on-month. These figures align with market expectations, and the core CPI has reached its lowest level in 43 months. The decline in used car prices and airline fares, which fell by 2.3% and 1.6% respectively in July, contributed to the overall decrease in consumer price inflation. However, compared to the previous month, the price index rose by 0.2%, up from a -0.1% change in June.

The recent four-month consecutive decline in CPI, approaching the Federal Reserve's target of 2%, suggests that an interest rate cut may be imminent. The Wall Street Journal (WSJ) commented that this announcement likely strengthens the argument for the Fed to start reducing rates at its September FOMC meeting. The Fed’s preferred inflation gauge is moving closer to its 2% target, and Fed Chair Jerome Powell has already hinted at a possible rate cut in September.

Joseph Brusuelas, Chief Economist at RSM US, stated that the improvement in accumulated inflation data over the past year provides the Fed with the opportunity to shift to risk management mode to ensure a soft landing.

Despite growing calls from economists for the Fed to cut rates in September, some Fed officials have maintained that they do not overreact to a single data point. Atlanta Fed President Raphael Bostic mentioned he wants to see more data before supporting a rate cut. Similarly, Chicago Fed President Austan Goolsbee noted that while employment data was weaker than expected, it does not yet indicate a recession, suggesting that a rate cut might be premature.

The July CPI data indicates a notable easing in inflationary pressures, fueling expectations that the Federal Reserve may lower interest rates in its upcoming September meeting. While the recent CPI figures are encouraging, Fed officials remain cautious and are considering a broader range of economic indicators before making a decision. As we approach the September FOMC meeting, all eyes will be on how the Fed responds to the evolving economic landscape and inflation trends.