Inflation in the United States has seen a decline to 2.9% in the past month, according to officials. This drop from 3% in June marks the lowest rate since March 2021 and is below market expectations.
Economists have widely predicted that this easing inflation will prompt the Federal Reserve to cut interest rates next month for the first time since March 2020. The central bank has maintained interest rates at a steady range of 5.25% to 5.50% since July of last year.
The potential move by the Fed is expected to have an influence on other central banks, including the Bank of England, which cut interest rates earlier this month for the first time in over four years. Policymakers in the European Union and the UK are cautious about deviating too much from the US in order to avoid concerns over currency strength.
The news of the US inflation decline comes after an increase in UK inflation to 2.2% in July, the first rise in six months. Despite this, the Bank of England is still expected to cut interest rates again this autumn, with market predictions showing a nearly 90% chance of a reduction in November.
The latest data from the US also revealed a 0.2% increase in the month-on-month consumer prices index (CPI) of inflation, in line with expectations after a 0.1% decrease in June. Annual core inflation, which excludes volatile food and energy prices, remained at 3.2%, as forecasted.
Following the release of this data, financial markets in the US have predicted a more than 60% chance of the Fed cutting interest rates by 0.25 percentage points in September. There is also a 39.5% likelihood of a larger 0.5 percentage point cut. Prior to the release of the inflation data, the markets were evenly split between a 0.25 or 0.5 percentage point cut.
Paul Ashworth, an economist at research firm Capital Economics, described the latest CPI report as “mildly encouraging”. He believes it adds support for a 25 basis point rate cut in September, but does not indicate a collapse in price pressures that would warrant a larger 50 basis point reduction.
Investment firm Brandywine Global’s Jack McIntyre stated that inflation is not likely to be the determining factor in the Fed’s decision on the size of the interest rate cut. He added that upcoming data on the labor market will have a greater impact on the central bank’s thinking.
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