Inflation is Picking Up, But Fed Rate Cut is Still Expected

Inflation is Picking Up, But Fed Rate Cut is Still Expected

US consumer prices increased in July, but the signs of acceleration in inflation will likely do little to change market expectations that the Fed will cut interest rates again in September, October and December due trade tensions with China

The US Labor Department Tuesday lowered the chances that the Fed would cut rates by half a percentage point at its 17-18 September FOMC meeting.

Financial markets have fully priced in a 25-bpt reduction following a recent escalation in the trade dispute between the US and China.

Tuesday, The Trump Administration delayed the imposition of the additional tariff slated for 1 September on certain Chinese imports, including technology products and clothing, until 15 December.

The CPI increased 0.3% last month, lifted by gains in the cost of energy products and a range of other goods, the government said. The CPI has edged up 0.1% for 2 months running. In the 12 months through July, the CPI increased 1.8% after advancing 1.6% in June.

Economists polled by Reuters had forecast the CPI would accelerate 0.3% in July and rise 1.7% on a year-on-year basis.

The core CPI was boosted by increases in prices for apparel, airline tickets, healthcare and household furnishings. In the 12 months through July, the core CPI climbed 2.2%, the biggest gainer in 6 months, after rising 2.1% in June.

The 3-month core inflation rate spiked 2.8%, the most in 8 years, supporting the view that weak inflation readings earlier in the year were caused by transitory factors.

The Fed has a 2% inflation target, it tracks the core PCE (personal consumption expenditures) price index for monetary policy. The core PCE price index rose 1.6% Y-Y basis in June and has undershot its target this year.

Weak transitory components that were weighing on inflation are rebounding as expected.

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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