US consumer price inflation cools sparking interest rate cut talk

(Alliance News) - Markets are hoping for an interest rate cut in September from the US Federal Reserve, with cooling consumer price inflation offering further reassurance.

"The market is nearly fully pricing in a September rate cut from the Federal Reserve," said Kathleen Brooks, research director at XTB.

"The market is now expecting more than 2 rate cuts from the Fed this year. This pricing suggests that the market is confident that the US will engage in a rate cutting cycle in the coming months, and that rates will not stay higher for longer."

According to the CME FedWatch tool, there is a 93% chance that policy makers will leave interest rates unchanged at its next meeting on July 31.

At its September meeting, however, there is a 90% chance that interest rates will be cut by 25 basis points.

July's expectations represent "prudence in short-term monetary decisions", according to Antonio Ernesto Di Giacomo at xs.com.

On Thursday, the Bureau of Labor Statistics reported that the year-on-year consumer price inflation rate was 3.0% in June, cooling from a 3.3% rise in May. According to FXStreet, markets were expecting CPI to come in at 3.1% for June.

On a monthly basis, consumer prices declined 0.1% in June, after being unchanged in May from April. Prices had been expected to register a 0.1% increase this time around, so the latest reading undershot the consensus.

"These figures reinforced expectations of rate cuts by the Fed, possibly in September," Di Giacomo said.

Meanwhile, President Joe Biden said the US is making "significant progress fighting inflation."

"Prices are falling for cars, appliances, and airfares, and grocery prices have fallen since the beginning of the year," Biden added, though conceding that overall costs are "still too high" as he battles to win reelection this year.

A senior Federal Reserve official said Thursday that some central bank policy adjustments will likely be warranted as inflation slows and the labour market gradually cools.

But San Francisco Fed President Mary Daly, in a media interview, did not commit to a timing for this shift, maintaining that officials will remain data-dependent in their decisions.

It is clear that "monetary policy is working," Daly noted on Thursday.

However, numbers on Friday showed that US producer prices grew at a slightly faster pace than expected in June.

The Bureau of Labor Statistics said producer prices rose 2.6% on-year in June, picking up speed from a 2.4% climb in May. It is the sixth successive month that the yearly rate of producer price inflation has picked up.

Producer prices had been expected to rise 2.3% on-year, according to FXStreet cited consensus, so the latest reading topped expectations.

On-month, producer prices rose 0.2% in June, topping expectations of a 0.1% rise. Prices were unmoved in May from April.

By Sophie Rose, Alliance News senior reporter

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