U.S. Inflation Hits 3-Year Low, Setting Stage for Fed Rate Cut

The U.S. economy received some welcome news as inflation cooled to a three-year low in July, raising expectations of an imminent interest rate cut by the Federal Reserve. 

Consumer prices rose just 0.2% from June to July and 2.9% on an annualized basis—the smallest increase since early 2021.

Inflation Cools Across the Board

The moderation in inflation was broad-based, with grocery prices up only 0.1% and just 1.1% higher than a year earlier. Gas prices were unchanged from June to July and have actually fallen 2.2% in the past year. Clothing, new and used car prices also declined last month.

Excluding volatile food and energy costs, so-called core prices climbed a mild 0.2% from June to July, after a 0.1% increase the previous month. Compared with a year earlier, core inflation slowed from 3.3% to 3.2%—the lowest level since April 2021.

Housing Costs Easing

The government attributed nearly all of July’s inflation increase to higher rental prices and other housing costs. However, real-time data suggests this trend is easing, indicating that housing costs should rise more slowly in the coming months, contributing to lower inflation.

Fed Poised to Cut Rates

The cooling inflation data has all but sealed the deal for the Federal Reserve to cut interest rates in September. When the central bank lowers its benchmark rate, it tends to reduce the cost of borrowing for consumers and businesses over time.

Fed Chair Jerome Powell has said he is seeking additional evidence of slowing inflation before the Fed begins cutting rates. With the July report showing continued progress, economists widely expect the Fed’s first rate cut to occur in mid-September.

Implications for the Economy and Politics

The ongoing inflation slowdown could have significant implications for the U.S. economy and presidential campaign. Former President Donald Trump has highlighted rampant inflation as a key failing of the Biden administration, while Vice President Kamala Harris has said she would soon unveil new proposals to “bring down costs and also strengthen the economy overall”.

As inflation continues to ease, the Fed will be paying closer attention to the job market. The central bank’s mandates, as outlined by Congress, are to maintain price stability and promote maximum employment.

In summary, the U.S. economy appears to be turning a corner on inflation, with consumer prices rising at the slowest pace in three years. This development has set the stage for the Federal Reserve to begin cutting interest rates in September, potentially providing a boost to the economy and reshaping the political landscape.