US inflation hits 43-month low at 2.5% YoY in August: Wall Street lifts 25 bps Fed rate cut bets; Here’s why

  • US inflation: The US consumer price index (CPI) slowed to 2.5 per cent in August from a year ago, down from 2.9 per cent in July and the lowest annual figure since February 2021

Nikita Prasad
Published11 Sep 2024, 09:50 PM IST
US inflation hit a three-year low in August, lifting Wall Street Fed rate cut bets for next week
US inflation hit a three-year low in August, lifting Wall Street Fed rate cut bets for next week

US inflation cooled for the fifth straight month and rose less than expected in August 2024, giving a major boost to Wall Street's bets on the US Federal Reserve's definite interest rate cuts of 25 basis points (bps) next week. 

Despite the positive round figure, underlying inflation unexpectedly picked up in August due to higher prices for housing and travel, undermining the chances of an outsized US Federal Reserve rate cut in the upcoming policy meeting. Wall Street sharply lowered the probabilities of a broader 50 bps reduction.

Also Read: US Fed set to announce first rate cut in four years next month: How will it impact India’s RBI policy? Experts weigh in

The US consumer price index (CPI) slowed to 2.5 per cent in August from a year ago, down from 2.9 per cent in July and the lowest annual figure since February 2021, the Labor Department's Bureau of Labor Statistics said on September 11. 

The annual CPI in August was at a three-year or 43-month low, while CPI increased 0.2 per cent in August, dragged down by lower gasoline prices after rising by a similar margin in July. An interest rate cut by the independent US central bank would boost demand in the world's largest economy. 

The mixed inflation report from the Labor Department followed data last week showing the labor market still cooling in an orderly fashion in August, defying fears of a sharp deterioration, with the unemployment rate retreating from a near three-year high touched in July.
 

Also Read: US Federal Reserve ‘must go big with 50 bps interest rate cut in September’ or risk recession: Experts
 

US inflation: Key metrics

Despite the good news on the headline rate, a measure of inflation that strips out volatile food and energy costs was largely unchanged annually, indicating that the underlying US inflation remains sticky.

The so-called core consumer price index — which excludes food and energy costs — increased 0.3 per cent from July, the most in four months, and 3.2 per cent from a year ago. The core CPI was boosted by a 0.5 per cent rise in shelter, which includes rents and hotel and motel accommodation, after advancing 0.4 per cent in July. Core CPI increased at a 2.1 per cent rate in the last three months.

Economists see the core gauge as a better indicator of underlying inflation and future inflation trends than the overall CPI. Prices increased at a 1.1 per cent annualized rate in the past three months, indicating that a disinflationary trend was now firmly entrenched, allowing policymakers to focus more on the labour market in their quest to sustain the economic expansion.

Also Read: RBI vs US Fed: Which central bank will cut interest rates first? Here’s a 5-point analysis

Food prices edged up 0.1 per cent after climbing 0.2 per cent in each of the past two months. Grocery store food prices were unchanged as increases in the costs of meats, fish, eggs and dairy products were offset by decreases in nonalcoholic beverages, fruits and vegetables. Over the past year, grocery prices have ticked up just 0.9 per cent, similar to the pace of pre-pandemic food inflation.

The costs of energy products dropped 0.8 per cent after being unchanged in July. Gasoline prices fell 0.6 per cent, while electricity was 0.7 per cent cheaper and natural gas cost 1.9 per cent less. Average gas prices are down 10.6 per cent from a year ago. 

The cost of household insurance shot up 0.8 per cent after being unchanged in July. Airline fares rebounded 3.9 per cent after declining 1.6 per cent in July. Motor vehicle insurance also costs more, though the pace of increase slowed from the prior month. The cost of lodgings, including hotel and motel rooms, surged two per cent after rising 0.2 per cent in July. Healthcare costs fell for a second straight month. 

Also Read: US Fed rate cut: Can a 25 bps cut disappoint the Indian stock market? 5 experts weigh in

Overall, services costs rose 0.3 per cent for the second consecutive month. Services less rent of shelter gained 0.1 per cent after being unchanged for two straight months. Excluding housing and energy, service prices advanced 0.3 per cent, the most since April.

Shelter prices, the largest category within services, climbed 0.5 per cent, the most since the start of the year. That marked the second month of acceleration and defied widespread expectations for a downshift.

Owners’ equivalent rent—a subset of shelter and the biggest individual component of the CPI—rose at a similar pace. It measures the amount homeowners would pay to rent or earn from renting their property.

Goods prices extended their decline, with a 0.1 per cent drop in August. They were pulled lower by a one per cent decrease in used cars and trucks prices as well as moderate declines in the costs of prescription medication and household furnishings. Measured from a year earlier, used car prices have tumbled 10.4 per cent.

Also Read: US Fed Chair Jackson Hole 2024 Highlights: Powell says ‘time has come’ for Fed to slash interest rates

The so-called core goods prices, which exclude food and energy commodities, fell 0.2 per cent after slipping 0.3 per cent in July. The metric has now declined in 14 of the last 15 months. Americans’ paychecks have risen steadily for the past three years. Overall incomes have even outpaced inflation for roughly 18 months, helping more households handle elevated prices.

For months, cooling inflation has provided gradual relief to US consumers, who were stung by the price surges that erupted three years ago, particularly for food, gas, rent, and other necessities. Retail inflation peaked in mid-2022 at 9.1 per cent, the highest rate in four decades.
 

Also Read: US Fed rate cut: Can it boost the Indian stock market? What sectors may gain? Experts weigh in
 

US inflation bolsters 25 bps US Fed rate cut bets

The pick-up in core inflation from July to August reflected an acceleration in housing costs and some spikes in the prices of airfares and hotel rooms, which are likely to prove temporary. Fed officials, who watch housing costs closely, expect them to cool more consistently.

The US central bank, which has a two per cent inflation target, tracks the Personal Consumption Expenditures price (PCE) indexes for monetary policy. Alongside the ongoing slowdown in consumer inflation, the Fed's favoured inflation measure has also eased towards the bank's long-term two-per cent target in recent months.

Government data last week showed nonfarm payrolls increasing below expectations in August but the unemployment rate falling to 4.2 per cent from 4.3 per cent in July. The labor market is cooling amid a significant moderation in hiring, reducing the risks of inflation reigniting. 

Also Read: Crude View: D-Street experts peg Brent at $75-80 in near-term, Morgan Stanley cuts forecast by $5 on soft demand

Hiring over the past three months is at the lowest since mid-2020, while job openings declined and layoffs rose in July. Fed officials also pay close attention to wage growth, as it can help inform expectations for consumer spending — the economy's main engine. 

In addition, oil prices have dropped, and supply chains have improved considerably. Market rents continue to trend lower, which suggests that the official rent measures will move down at some point.

Against this backdrop, Fed policymakers have shifted attention from inflation to the unemployment part of the bank's dual mandate, indicating that rate cuts are coming. "The time has come for policy to adjust," Fed chair Jerome Powell said last month. "The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, evolving outlook, and the balance of risks," he added.

Also Read: US Fed Meet Highlights: FOMC holds rates steady for 12 months, admits ‘progress’ on inflation; Powell flags Sept cuts

Financial markets saw a roughly 15 per cent probability of a 50 basis points rate cut at the Fed's Sept. 17-18 policy meeting, down from 29 per cent before the CPI data was published, according to CME Group's FedWatch Tool. The odds of a quarter-point rate reduction were around 85 per cent, up from 71 per cent earlier.

The central bank has maintained its benchmark overnight interest rate in the current 5.25 per cent-5.50 per cent range for one year, having raised it by 525 basis points in 2022 and 2023. The Fed’s policymakers have signalled that they are increasingly confident that inflation is falling back to its two per cent target and are now shifting their focus to supporting the steadily cooling job market. 

As a result, they are poised to begin cutting their benchmark interest rate next week from its 23-year high in hopes of bolstering growth and hiring. Overall, a modest quarter-point cut is widely expected. 

Also Read: US Fed’s expected rate reversal: What’s at stake for India

The pickup in core inflation makes it unlikely that the US Fed would consider cutting its key rate by a larger-than-usual half-point next week, as some Wall Street traders had hoped.  Still, over time, a series of Fed rate cuts should reduce the cost of borrowing across the economy, including for mortgages, auto loans and credit cards.

Investors will now turn their attention to the upcoming US Fed interest rate decision, which will be announced on September 18.

 

 

With inputs from AFP, AP, Bloomberg, and Reuters

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First Published:11 Sep 2024, 09:50 PM IST
Business NewsEconomyUS inflation hits 43-month low at 2.5% YoY in August: Wall Street lifts 25 bps Fed rate cut bets; Here’s why

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