Fed’s policy tightening campaign unlikely to be swayed by CPI figures showing annual price increase moderated to 8.5%
The US consumer price index rose by 8.5 per cent year on year in July, a slower annual increase compared with June, as inflationary pressures eased on the back of lower petrol prices.
The CPI data released on Wednesday will raise hopes that the pace of price rises in the world’s largest economy has peaked and has started to decelerate, which will be of comfort to both the Federal Reserve and the Biden administration.
According to the figures, there was no increase in the CPI between June and July, compared with a 1.3 per cent monthly rise recorded a month ago. On an annual basis, the growth in the CPI fell back from a 9.1 per cent increase in June.
Both figures were improvements over economists’ expectations of a 0.2 per cent increase in the CPI on a monthly basis and an 8.7 per cent rise annually — but mean inflation is still close to 40-year highs.
The data are unlikely to represent a large enough shift to stop the Fed from ploughing ahead with more aggressive tightening of monetary policy to subdue inflation. Fed chair Jay Powell has said the US central bank was looking for “compelling” evidence that inflation was moving down towards its 2 per cent target.
The core measure of CPI — which strips away more volatile food and energy prices and is most closely watched by the Fed — also recorded an unexpectedly small monthly increase of 0.3 per cent compared with 0.7 per cent in June. But on an annual basis it rose at an unchanged pace of 5.9 per cent.
Annual inflation remains high, but prices have leveled off since last month
A potential sustained deceleration in inflation could mean the central bank might not need to keep raising interest rates at a steep pace for a long period. This could make a “soft landing” that avoids recession more likely. Earlier this week, the New York Fed said its consumer survey showed declining inflation expectations, which would also be an important factor in the policy decision-making process.
“With headline inflation still at 8.5 per cent and core inflation at 5.9 per cent, this is not yet the meaningful decline in inflation the Fed is looking for. But it’s a start and we expect to see broader signs of easing price pressures over the next few months,” said Paul Ashworth, chief US economist at Capital Economics.
Traders took an encouraging view of Wednesday’s data and priced in smaller interest rate increases from the Fed in the coming months. The central bank is expected to lift rates to 3.4 per cent by year-end, according to futures pricing, down from 3.6 per cent before the release of the report. Bets that the Fed would raise rates by 0.75 percentage points at its September policy meeting also fell.
US stocks jumped in response, with the benchmark S&P 500 up 1.7 per cent in early New York trading. The Nasdaq Composite, which comprises tech shares that are more sensitive to changes in interest rate expectations, leapt 2.2 per cent.
US government bonds also rallied, with the yield on the 10-year Treasury note — a proxy for borrowing costs worldwide — was down 0.07 percentage points to 2.73 per cent, according to Refinitiv data. The policy-sensitive two-year yield slid 0.18 percentage points to 3.1 per cent, reflecting a rise in the price of the instrument.
Within the CPI, the drop in petrol prices was the driving factor of the deceleration, along with a decline in the cost of airfares. But the price of food and shelter continued to increase roughly in line with previous months, which will still weigh on the finances of many households.
“One of the problems with this number is that the rent pressure is lingering,” said Tom di Galoma, of Seaport Global Holdings, which could weigh on consumer spending. “I think the Fed wants to get this tightening cycle over with as soon as possible, which means a 0.75 percentage point increase in September.”
