Slight rise in US inflation won’t derail Fed’s September rate cut

(Times Of Update) — U.S. inflation likely rose slightly in July, but not enough to prevent the Federal Reserve from delivering a widely expected interest rate cut next month.

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The consumer price index is expected to rise 0.2% from June, both in the headline figure and in the so-called core indicator that excludes food and energy. While each of these indicators is an acceleration from June, the annual indicators are expected to continue to increase at some of the slowest rates seen since early 2021.

The recent easing of price pressures has boosted Fed policymakers’ confidence that they can begin to cut borrowing costs while refocusing their attention on the labor market, which is increasingly showing signs of slowing.

The July jobs report showed that U.S. employers cut hiring sharply and the unemployment rate rose for a fourth straight month, triggering a key indicator of recession and contributing to a slide in global stock markets.

If the CPI comes in line with expectations, it would indicate that inflation remains on a downward trend, and economists say a modest recovery is expected after the surprisingly low June reading. They believe the turnaround is largely driven by basic services, excluding housing, a key category monitored by policymakers. Some forecasters also point to a risk of rising goods prices due to rising transportation costs.

However, the long-awaited slowdown in housing prices that began in June is expected to continue. This category accounts for about a third of the overall CPI and is a key driver of the overall inflation trend.

The producer price index, due a day before the CPI, will be scrutinized to determine which categories feed into the Fed’s preferred inflation gauge, the personal consumption expenditures price index.

What Times Of Update Economics says:

“July CPI will likely be weak, with the annual change in core CPI declining. Markets could rally on this news, but we think the implications for the Fed’s preferred price gauge – the core PCE deflator – will be more mixed when CPI data is considered alongside the PPI.”

—Anna Wong, Stuart Paul, Eliza Winger, Estelle Ou and Chris G. Collins, economists. For a full analysis, click here

Another report next week is expected to show a recovery in overall retail sales in July, but once some components are removed to access the control group – which is used to calculate gross domestic product – sales are expected to slow significantly.

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Other data on the agenda include the latest inflation forecasts, small business sentiment, industrial production and new home construction. Regional Fed Presidents Raphael Bostic, Alberto Musalem, Patrick Harker and Austan Goolsbee are expected to speak.

Speaking Saturday, Fed Governor Michelle Bowman said she still sees upside risks to inflation and continued strength in the labor market, signaling she may not be ready to support a rate cut at the next meeting of U.S. central bankers in…