Closing post
Time for a recap.
Inflation reports on both sides of the Atlantic have bolstered hopes of interest rate cuts next month.
In the UK, annual inflation rose by less than expected to 2.2% in July, up from 2% in June.
Prices fell by 0.2% in July – helped by cheaper hotel stays – but this was smaller than the 0.4% decrease in prices in July 2023, when energy bills dropped sharply, meaning that the headline rate of inflation increased. The energy price cap, set by the industry regulator, Ofgem, fell by 8.6% in July 2023 but by 7.2% in the same month this year.
The ONS’s chief economist, Grant Fitzner, said:
“Inflation ticked up a little in July as, although domestic energy costs fell, they fell by less than a year ago. This was partially offset by hotel costs, which fell in July after strong growth in June.”
The money markets now suggests a 40% chance that the Bank of England lowers interest rates in September, up from 36% last night.
In the US, the annual inflation rate dipped below 3% in July for the first time since 2021.
That’s a relief to investors who are expecting the Federal Reserve to cut interest rates next month as a sense of unease has settled over Wall Street after signs of a cooling labor market.
Prices rose at an annual rate of 2.9% in July while core inflation, which does not account for the volatile food and energy industries, climbed 3.2% over the previous 12 months and 0.2% since June.
Goodnight! GW
Today’s inflation data provides further support for “aggressive Fed rate cuts” beginning in September, declares Preston Caldwell, chief US economist at Morningstar:
That’s likely to start with a cut of a quarter of one percentage point, Caldwell suggests, which would bring the Fed funds rate down to a 5%-5.25% range.
“Optimal monetary policy calls for a hefty reduction in the federal-funds rate in short order. Markets reflect that, with the federal-funds rate expected to drop to 3.00 to 3.25%, a cut of 200 basis points, by September 2025.
The Fed’s rhetoric is steadily shifting in this direction as well. Our base case for the upcoming September 2024 meeting is still for just a 0.25% cut, rather than the 0.5% point cut that many market participants are now expecting.
While the rise in the unemployment rate is flashing alarm signs, other labour market indicators look more benign. Not to mention, economic activity continues to expand at a solid pace for now, although we do expect a deceleration over the next year.”
