Inflation cools to 2.9%, shoring up case for a Fed rate cut

Chairman of the U.S. Council of Economic Advisers Jared Bernstein speaks Thursday during a press briefing alongside White House Press Secretary Karine Jean-Pierre, in Washington. (REUTERS/Kevin Mohatt)
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WASHINGTON — The consumer price index cooled in July compared with a year earlier, providing further evidence that inflation is moderating and leaving the Federal Reserve firmly on track to cut interest rates at its meeting next month.

Overall inflation was 2.9% in July on a yearly basis, the Bureau of Labor Statistics reported Wednesday, down from 3% in June and slightly milder than what economists had expected.

A “core” measure that strips out food and fuel prices for a sense of the underlying trend also continued to cool.

In all, the new report signified an important moment in the Fed’s fight against rapid price increases. This is the first time this inflation measure has slipped below 3% since 2021, and while price increases are still quicker than the 2% pace that was normal before the coronavirus pandemic, they are much slower than the 9.1% peak they reached two years ago.

The inflation report likely cements the case for a rate cut at the Fed’s Sept. 17-18 meeting, economists said. Fed officials have been holding borrowing costs at 5.3%, the highest level in more than two decades, to slow demand and bring price increases under control. They have been tiptoeing closer to a rate cut as inflation has eased, and they made it clear after their July meeting that they wanted to see just a bit more progress before making their first move.

The new data “really ticks the box,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. He said the “big question” now is how big the Fed’s reduction will be.

For consumers, who are still getting used to higher price levels at the grocery store or the used car lot, cooler inflation means that the sudden cost jumps that became common in 2022 and 2023 are increasingly a thing of the past.

And for Democrats and President Joe Biden’s White House, that is a welcome development: It could help American voters to feel more optimistic about the economy.

“It’s great to see a ‘two’ handle on the yearly CPI,” Jared Bernstein, chair of the White House Council of Economic Advisers, said in an email following the release. “It doesn’t mean our work is done, but it does mean we’re moving in the right direction, and with a bit of momentum.”

Milder inflation may help Vice President Kamala Harris in her campaign for president as the Democratic nominee. Former President Donald Trump, the Republican candidate, regularly blames Democrats for the run-up in prices since the pandemic — but that could become a less powerful talking point as increases slow and shoppers have time to acclimate.

The July cool-down was in line with expectations, and the market reaction was muted.

The Fed has held interest rates at their current level for the past year. Investors think the big question for the Fed’s meeting in September is whether policymakers will cut rates by a quarter of a percentage point, a typically sized move, or by a half-point, which would be an unusually large reduction.

Investors began to bet that a bigger rate move was possible — even, they temporarily believed, likely — after an unexpectedly weak jobs report was released this month. It showed that unemployment rose notably in July and that hiring had slowed. Joblessness has been creeping higher for months, which rarely happens outside of recessions.

Many Fed watchers thought that policymakers were likely to react by cutting rates more aggressively, because the Fed has two key jobs: keeping inflation in check and fostering a strong job market. With inflation coming under control, the thinking went, Fed officials would begin to focus more intently on protecting the labor market.

But developments in recent days have suggested that while the economy is moderating, it is not falling apart. Jobless claims eased last week. And recent company earnings reports suggest that consumers are still spending, if a bit more cautiously.

While hotel operator Marriott reported “a hair more caution,” it said people were still traveling, for instance. And clothier Ralph Lauren saw “good relative momentum” from more well-to-do customers.

And though Wednesday’s inflation figures suggested that price increases are easing, they are not grinding to a standstill. In fact, investors increasingly bet on just a normal-size rate cut after the data release.

While many categories showed only mild price increases in July — including food, hotel room rates and personal care services — rent-related inflation indexes unexpectedly ticked up.

That’s notable, because Fed officials have spent months closely watching those shelter inflation measures, expecting them to begin to cool consistently. It served as a reminder of why the Fed has been cautious in declaring victory over inflation.

Still, there are reasons that the July jump in shelter costs could have been a one-off. They were concentrated in just a few places, for instance.

“If you want to look at the totality of the data, the totality in my mind is pretty clear, and it is definitely toward more disinflation,” said Omair Sharif, founder of the research firm Inflation Insights. The Fed will receive a few more key data points before its next meeting — and its big decision about how much to cut interest rates.

Fed policymakers aim for 2% annual inflation based on the personal consumption expenditures inflation measure, which comes out later than the consumer price index. That data for July will be released Aug. 30.

In addition, officials will receive consumer price index data for August on Sept. 11, just a week before their policy decision.

But perhaps most important, Fed officials will get an August jobs report on Sept. 6, which should give them a clear sign of what is happening in the labor market — and whether they need to act more forcefully to make sure that the economy stays on track.

“What this does is it allows them to focus on the labor market side of the equation,” Goldberg said of Wednesday’s inflation report.

This article originally appeared in The New York Times.

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