The cooling of inflationary pressures in the U.S. is strengthening the case for the Federal Reserve to begin lowering interest rates, allowing policymakers to pivot their attention toward bolstering the labor market. Analysts at Saracen Markets are forecasting a modest 0.2% increase in both the consumer price index (CPI) and the core CPI, which excludes volatile food and energy prices, in data set to be released today. If realized, this would mark the smallest three-month gain in core inflation since early 2021, signaling a significant easing of price pressures.
July’s CPI is expected to reflect a softer inflation landscape, driven by several key factors: a long-anticipated slowdown in housing rent increases, a decline in used-car prices, and widespread discounts in discretionary services as consumers pull back on spending. These developments suggest that the Fed may have more room to maneuver in terms of monetary easing, particularly as the focus shifts from battling inflation to sustaining economic growth and employment.
Global markets appear to be reacting positively, with sentiment improving after last week’s recession fears. The latest data on U.S. producer prices, which often serve as a leading indicator for consumer price trends, showed further progress in curbing inflation. This has provided additional momentum for the ongoing risk rally.
In commodity markets, oil prices rebounded during Asian trading sessions, recovering from Tuesday’s losses. The rebound was driven by an industry report indicating a significant drop in U.S. crude stockpiles, alongside lingering geopolitical tensions in the Middle East. Meanwhile, gold prices edged lower as the market’s risk appetite increased.
As the U.S. inflation picture continues to improve, the Fed’s potential shift towards rate cuts could mark a significant turning point in the economic outlook, with the central bank poised to refocus its efforts on supporting the labor market and ensuring a soft landing for the economy.