Falling US inflation paves way for possible Fed rates cut from Sept

US inflation is currently one of the most closely monitored macroeconomic variables globally. Over the last several months, higher than expected price pressures in the US economy have created concerns of inflation being stickier.

However, year-over-year inflation in the United States reached its lowest level in more than three years in July, the latest sign that the worst price spike in four decades is fading and setting up the Federal Reserve for an interest rate cut in September.

The recent report from the US Labour Department showed that consumer prices rose just 0.2% from June to July after dropping slightly the previous month. Measured from a year earlier, prices rose 2.9%, down from 3% in June. It was the mildest gain since March 2021, Associated Press News reported.

The government said nearly all of July’s inflation reflected higher rental prices and other housing costs, a trend that, according to real-time data, is easing. As a result, housing costs should rise more slowly in the coming months, contributing to lower inflation.

The report showed that inflation is steadily falling closer to the Fed’s 2% target — though not too quickly, which might suggest that the economy is weakening, said Tara Sinclair, an economist at George Washington University and a former Treasury Department official.

"It’s a comforting report, both because it is going in the right direction and because it is not doing anything too dramatic,” Sinclair said. "It is exactly what we wanted to see.”

In July, grocery prices rose just 0.1% and are a scant 1.1% higher than they were a year earlier, a much slower pace of growth than in previous years.

Yet, many Americans are still struggling with food prices, which remain 21% above where they were three years ago, Associated Press News noted.

Gas prices were unchanged from June to July and have actually fallen 2.2% in the past year. Clothing prices also dropped last month; they’re nearly unchanged from 12 months earlier. New and used car prices fell in July, too. Used car prices, which had skyrocketed during the pandemic, have tumbled nearly 11% in the past year.

Inflation in the US has come down significantly from its peak and should continue to moderate over the coming months towards more acceptable levels, on the back of strong productivity growth, falling labour market pressure, and decelerating rent inflation.

US data prints have signalled that the economy is standing on a firm footing. Overall, healthy household balance sheets and robust labour market continue to provide support to US consumption.

This, according to Mena’s largest bank QNB, will set the stage for the beginning of the cycle of interest rate reductions by the Federal Reserve in September.

"We expect two 25 bps cuts this year and subsequent 25 bps cuts every other policy meeting until early 2026, when rates should rest at 3.75-4%,” QNB said recently.

The performance of the US economy has bolstered a remarkable upward trajectory in its growth projections.

The improving outlook and perspectives for the world’s largest economy provide a significant contribution to positive global growth forecast and outlook.